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b.) To what extent can free trade and free markets achieve economic development?
Many development economists argue the fact that free trade and free markets promote economic develop-
ment for developing countries. To some extent both free trade and the free market do help an economy de-
velop, however to what extent do the benefits of each outweigh the costs, and how would each of these
policies infuence the brazilian economy? Free trade (or trade liberalisation) is the lifting of trade barriers such
as tariffs or quotas, and not discriminating against imports from any country. A free market, is a market with
minimun government intervention whereby the forces of demand and supply help allocate resources effi-
ciently.
Trade liberalisation can be the key to developing an economy. With free trade, a country can exploit its com-
parative advantage. Comparative advantage is the ability of an economy to produce a good at a lower op-
portunity cost. With no trade barriers, competitiveness of goods with a comparative advantage would
increase. This would therefore increase global trade. “At the end of the 1980s, a consensus was developing
to promote some kind of trade liberalisation process. It was becoming increasingly clear that protectionist
policies were affecting the competitiveness of Brazil’s exports” (Brazil Trade Liberalisation). Trade liberalisa-
tion gave a boost to brazilian exports. They rose from US $ 46.9 bn in 1999 to US $ 256 bn in 2011. As they
were now cheaper the EU and the US could afford to buy them, instead of their own domestically produced
products, thus giving a boost to economic development.
However some policies may prove to be more effective for development for a developing country rather than
free trade. Import substitution, is a policy which protects domestic industries by applying protectionist meas-
ures, such as tariffs and quotas, on imports in order to protect domestic firms from the competition pre-
sented by larger, more efficient companies. Brazil did this in the early 1980s in order to protect their domestic
companies. As domestic companies were not large, by protecting them from imports, brazilian companies
managed to grow and gain economies of scale. This made them more efficient and more competitive. Dur-
ing that period, Brazil grew at an average rate of 6%.
In addition to that, a problem that would arise from free trade is overdependance and deteriorating govern-
ment finances. Most developing countries will have a comparative advantage in agriculture and other com-
modities. By overdepending on primary products, they will be vulnerable to supply shocks and price
fluctuations. If other industries are not developed then this would in turn deteriorate the standard of living.
In addition for many governments revenues for tariffs are an important part of government revenues. Agri-
cutlure in Brazil contributes 6% of GDP. In addition, Brazil exports services to countries in Latin America. The
service sector makes up 67% of its GDP, and in 2010 Brazil exported services worth US $ 31.8 billion. Brazil
has capitalised on exporting telecomunnications services such as IT, and business services such as banking to
latin american countries as they have not developed their service sectors. This has contributed a lot to growth
in Brazil.
The free market also has a role in economic development. Some common characteristics of countries with
high growth rates are high levels of investment and savings and an equitable allocation of resources. These
are also characteristics of free markets. This can be achieved through privatisation. When companies are pri-
vatised they tend to become more efficient. This would help them build up competitiveness in the interna-
tional market. In privatised companies, workers that are not needed are laid off, but as owners of resources
are individuals and not the government, they will invest more and subsequently in the long run the produc-
tive potential of the economy will increase.Brazil has seen an increase in privatisation. Water utilities in Brazil
have been privatised. In addition plans are being drafted for the privatisation of airports.
However a disadvantage that arises from the free market is income inequality. Privatised companies would
lay off a lot of workers, thus causing higher levels of unemployment in the economy. This would cause an in-
crease in relative poverty in the economy. Increased unemployment meants that Long Run Aggregate Sup-
ply would shift to the left as the economy would not produce at its maximum potential. As disposable income
would decrease for some people, then income inequality in Brazil would rise. In 2011, it is estimated that the
top 20% households in terms of income earned, held more than 60% of National Income. This is shown by
the Lorenz Curve. Income inequality, is a major constraint to economic development, as with high inequal-
ity, standard of living will not rise.
The index of economic freedom, measures to what extent an economy is a free market economy. In 2009
Brazil ranked 100th with an index of 56.7. At the same time Mexico ranked 50th with an index of 67. Its eco-
nomic freedom is close to many eurozone economies. The chart shows the levels of investment in an econ-
omy as a percentage of GDP. Mexico, has conistently higher investment and this can be accounted to a greater
economic freedom enjoyed in Mexico. If Brazil reaches a stage of greater economic freedom, owner of re-
sources would invest more, creating more jobs and therefore the standard of living would increase.
The policies of Free Trade and Free Markets can aid in a developing economy. For the brazilian economy it is
important not to completely abolish tarffs, as they would protect domestic firms and in addition would give
revenue to the government. However the experience of the past has shown that import substitution works
well at the primary stages of economic development in Brazil. For an economy like Brazil, export oriented
growth would be more beneficial in increasing economic growth and standards of living. The free market
also helps development up to a certain extent. Countries with moderately high rates of economic freedom
seem to perform better than countries with less freedom as they invest more. Therefore, if Brazil wants to
achieve persistent and sustainable growth it still has a long way to go.
c) Examine three strategies which the country of your choice can adopt to achieve economic and social de-
velopment
With economic and social development being a vital priority for governments around the globe, there are
many strategies that Brazil could employ in order to achieve economic development paired with equality.
Brazil could invest in improving infrastructure projects, reform taxation systems and by imposing property
rights.
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