Fundamentals of How Brazil Makes Its Money

If you were to ask a Brazilian how it is they make money, they will likely begin by telling you about the wage they earn for working a certain number of hours at their job. They may even go on to tell you about the business, or the piece of land, or even the government bonds they own, all of which pay a certain amount of money in the form of profit, rent, and interest respectively. Looking at all these Brazilians in aggregate we can see how it is that Brazil makes its money since Brazil’s income is just the sum total of all its individual citizens’ incomes.

At this aggregate level, we find that Brazil has a lot going for it in that it is endowed with both an abundance of natural resources and people, but just as individuals may be endowed with certain natural talents, it is ultimately how these talents are managed and developed that determine income. Examining the fundamentals of how Brazil earns its income we find that while having an abundance of resources, including people, the country needs to begin to refocus its management and development strategies.

Brazil’s Income vs. the Brazilian’s Income

We may be tempted to think that Brazil must be doing relatively well with its management and development strategies, considering that its total income (i.e. GDP) was the eleventh-largest in the world in 2022 at USD $1.9 trillion. That’s a lot of money, making Brazil a major player in the global economy. Yet, considering Brazil’s total population (approximately 215.3 million in 2022), the average Brazilian income (i.e. GDP per capita) is relatively small at only about USD $8,900 in 2022.

Although Brazil’s income is relatively large, the relative smallness of its individual citizens’ income suggests that productivity improvements could be made. Note that this "smallness" of income is not without a vast workforce. In 2022, it's estimated that nearly 108 million individuals. Before considering some of these improvements let’s first take a look at what it is that Brazilians do to make money.

Brazil’s Income Decomposed

Decomposing Brazil’s income, we find that it is derived from the following three sectors: agriculture, industry, and services. A further decomposition shows that the agriculture sector is comprised of coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus, and beef; the industry sector is comprised of textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, and other machinery and equipment; and finally, the service sector is comprised of hospitality, finance, IT BPO, retail sales, and personal services.

The work done in these sectors determines the supply of goods and services to both domestic and foreign consumers. In turn, the spending from these consumers results in income for Brazil’s workers. Yet, it is primarily domestic consumption that is responsible for supplying Brazil’s workforce with income as the country’s total exports comprised around 20% of GDP in 2022.

The Boom:?Increases in Foreign and Domestic Demand

The recent explosion in Chinese growth fueled a global commodity boom since the 2000s. As China is Brazil’s leading foreign consumer, this boom had significant benefits to Brazil’s exports, the value of which increased by approximately 250% over the same period.

Brazil’s economic climate during this time also helped attract large capital flows, leading to an enormous expansion of consumer credit. Domestic consumption rose significantly as household debt increased from 20% of personal income to 51% between 2005 and 2020.

Government spending also helped fuel consumption growth. Spending from the government, largely fueled by higher taxes and increased debt, increased between 2001 and 2021 from 15.7% of GDP to around 40%. Note that as of September 2023, the latest forecast has this ratio slightly decline between 2024 and 2028, concluding with the rate dropping below 40% in 2028.

Thus, much of the strong economic growth witnessed by Brazil in the first decade of the 21^st century was primarily due to external factors and not to the country’s prudent management and development strategies. As we shall see, these external factors soon dried up, revealing the real intrinsic weakness of Brazil’s economy.

Brazil's Imports and Exports

Robust economic data is available from 2021 regarding Brazil's imports and exports via the Observatory of Economic Complexity. In 2021, Brazil exported a total of $288 billion worth of goods. Among the top goods exported, Brazil set $46.2 billion of iron ore, $39 billion of coffee, and $30.7 billion of crude petroleum oil.

To get a sense of how Brazil makes money, it's also valuable to look at its most common imports. Brazil imported $225 billion of goods in 2021, led, by $13.1 billion of refined petroleum, $7.58 billion of motor vehicle parts/accessories, and $6.4 billion of vaccines.

The same can be said not only about how Brazil makes money but with whom it makes money with. Brazil's favorite trading partner in 2021 was China, sending $88.3 billion of goods overseas. Brazil also sent $30.2 billion of goods to the United States and $12 billion to Argentina. These same players are prominent in Brazil's imports, taking three of the top four spots. Brazil imported $53.8 billion from China, $39.3 billion from the United States, $12.4 billion from Germany, and $11.2 billion from Argentina.

Brazil's Tourism Industry

Prior to the pandemic, Brazil was also heavily reliant on tourism as a source of income. For example, the country reported over 6.6 million tourist arrives in 2018 and over 6.3 million tourism arrivals in 20119. Then, as a result of global shutdowns and travel restrictions, the country only saw 2.1 million tourists in 2020 and 746,000 in 2021.

Post-pandemic, Brazil is already seeing growth and health in the tourism industry. According to the Brazilian government, the touristm sector grew by 85.7% compared to the same period in 2021. This includes critical revenue strams such as air, restaurants, hotels, rentals, catering, and travel agencies. The states of Ceara, Minas Gerais, Espirito Santo, Federal District, Bahia, and Rio Grande do Sul were called out with strong progress.

Moving Forward: Improvements for Income Growth

As evidenced by Brazil’s relatively low GDP per capita noted above, the country needs to focus its energy on increasing productivity, which will in turn increase its international competitiveness. In fact, a recent competitiveness study ranked Brazil 15^th among 16 peer nations, and the country has been at the bottom of these rankings for the past three years.

There appear to be headwinds not just for Brazil but for countries around the world looking forward. For example, Brazil's 2022 real GDP as a percentage in annual year-over-year growth was 2.9%. However, the IMF forecast Brazil's GDP to grow just 0.9% in 2023 and 1.5% in 2024. The IMF is expected about half as much growth in 2024 for all Latin American and Caribbean countries in 2024 compared to 2022.

There are several development improvements Brazil could undertake?to increase its competitiveness. These improvements could include increasing investment, promoting closer integration with major markets, upgrading infrastructure that will connect Brazil to the rest of the world, lowering regulatory costs, improving public sector efficiency, and improving education and training.

The Bottom Line

Brazil has a lot going for it as it has an abundance of natural resources and people. Yet, as recent events have shown, having an abundance of these things does not necessarily mean strong incomes for citizens. These resources must be appropriately managed and developed. Brazil has some of the fundamental components of what it takes to make money, but if it wants to truly improve the lives of its citizens then it will need to develop greater productivity and increase its international competitiveness.?