Example research essay topic: Economic Turmoil Of Present Day Brazil – 1,198 words

After reviewing the Defending the Brazilian Real
case study, I was amazed at what I learned. How
can a country that is such a known for its festive
atmosphere and abundance of natural resources, be
going through such economic turmoil? Im sure no
one in the United States could imagine their rent
doubling every 10 weeks. That their credit card
charged 25% interest. That the costs for food and
clothes increased by 40%. That the value of their
savings declined 2000%. In a year! Well in my
research, I learned that this is what the citizens
of Brazil experienced for ten years, 1987 to 1997.
During those ten years, 40% of GNP was eaten up by
inflation, which means nearly everyone got rid of
cash as fast as possible, because it literally
lost value in their pockets.

And the majority of
people were reduced to buying only the essentials
of life, which had a devastating effect on
industries that produced all kinds of goods and
services. In the case study, the reader is
introduced to the Brazilian economy at its turning
point away from hyperinflation, with the
introduction of the Real Plan. With steady
economic improvement, the Brazilian government
pursued economic policies to transform its
previous system to a market based system. The Real
Plan (also known as the Plano Real) was designed
by then Finance Minister, Fernando Henrique
Cordoso, to drive inflation out of the Brazilian
economy. When implemented in 1994, annual
inflation rate was running at 1000%. This level
discouraged economic activity and foreign direct
investments (FDI).

To fight inflation, the
Brazilian government replaced its previous
currency, the cruziero with the real. The real was
pegged to that of the US dollar. Interest rates
were repeatedly increased to maintain the value of
the real to that of the US dollar. For Brazil, the
high cost of credit helped reduce expansion of the
monetary supply and brought inflation under
control. The Real Plan was a success. This plan
ignited economy growth and increased FDIs in
Brazil.

The study further explained, in the midst
of all of the economic growth, the trade deficit
continued to grow. When I read this, I was
baffled. How can Brazil still be in trouble if the
economy was growing? According to the text, the
trade deficit was due in part to an overvalued
real, which hindered exports, while bringing
imports into the country. Estimates showed the
real was actually valued higher than the US
dollar. It was also mentioned that the rigid
structure of the government was to blame for the
trade deficit. Taxes and constitutionally mandated
budget items consumed 90% of the government
revenues.

With inflation now under control the
government could no longer rely on it to reduce
the value of public-sector commitments. Cordoso
made several attempts to solve the structural
deficit, but with limited progress. In the wake of
all their troubles, countries like Asia and Russia
suffered financial crises that put further strain
on the real. In response, Cordoso continued to
raise taxes and interest rates, which helped stem
the flow of capital and stabilize the real. This
helped to slow the economy. Inevitably, the
Brazilian bank entered the foreign exchange market
and sought the support of the International
Monetary Fund (IMF).

Of course there were many
critics to the IMF package, but the announcement
alone helped stabilize the real. Brazils economic
troubles didnt end. The government employee
pension tax proposals attached to the IMF package
were defeated in Congress, while a Brazilian state
declared moratorium on debt payments owed to the
central government. This debt moratorium caused
the Brazilian stock market to decrease. Though the
largest nation and economy in South America,
Brazil has long functioned well below its
potential. The Real Plan brought the economy under
control and stabilized Brazils currency.

In spite
of its problems, Brazil continues to attract large
amounts of foreign investment. I believe that
there will always be a great deal of concern about
Brazils ability to maintain its reserves and
exchange rate should the global markets suddenly
lose faith in the governments plans. Further
privatization and general fiscal reforms are
should be watched closely as are the economies of
Brazils neighbors on whom so much depends.
Discussion Questions 1. Explain the mechanism by
which the real plan helped to defeat
hyperinflation in Brazil. The mechanism by which
the real plan defeated hyperinflation was the
introduction of the real. In this, a tight
monetary policy was enforced.

To implement this
policy, the value of the real was pegged to that
of the US dollar and depreciated by under 7.5
percent per year. Brazilian authorities had to
raise interest rates repeatedly to keep the value
of the real against the dollar, to keep
depreciation under 7.5 percent. Overall, the high
cost of credit helped reduce the expansion of the
money supply. 2. What actions does the Brazilian
government need to take to defend the peg of the
real against the US dollar? To defend the peg
against the real, the Brazilian government had to
allow the Brazilian central bank to enter the
foreign exchange market by using its foreign
exchange reserves to purchase reals in the open
market. Second, the government announced $10.8
billion to follow through with budget cuts.

Third,
the Brazilian government repeatedly raised
interest rates in order to increase the
attractiveness of holding the real. 3. Do you
think the Brazilian government was correct to
place a high value on defending the peg of the
real against the US dollar? What were the costs to
Brazil of this policy? What were the benefits? No,
I dont think the Brazilian government was correct
to place a high value on defending the peg of the
real against the US dollar. According to critics,
this action actually hindered exports while
pulling imports into the country. By most
estimates, the real was overvalued against the US
dollar by 15-20%. The cost to Brazil to this
policy was a loss of foreign exchange reserves.
The benefit to Brazil with this policy was the
support of the International Monetary Fund (IMF)
and reforms associated with the partnership.

4.
What do you think might happen to the value of the
real, and the Brazilian economy in general, if the
Brazilian government abandoned its defense of the
real and decided to let it float against the
dollar? If the Brazilian government abandoned its
defense of the real and decided to let it float
against the dollar, the value of the real and the
Brazilian economy in general would benefit. By
allowing the real to float, this would help Brazil
keep its exports competitive. According to the
text, it could also reduce the need for the county
to raise interest rates to levels that severely
depressed economic activity and dramatically
increase the costs of servicing government debt.
5. What would be the implications of allowing the
real float for the rest of Latin America and for
the economy of the United States? According to the
text, implications for allowing the real to float
for the rest of Latin America and for the economy
of the United States would trigger panic among
international investors and undermine the
credibility of a government that had hitched its
wagon to a pegged exchange rate policy. Which in
turn would suggest inflation..

Research essay sample on Economic Turmoil Of Present Day Brazil