Brazil, China and India – Comparative Advantages

Having abandoned barbarism, humanity embraced Classical Antiquity, invented the Enlightenment and embarked on Globalization

Is that progress? If we consider that the transformation of the ape into “homo sapiens” took millions of years, the period from Antiquity to our present day is far too short to allow for evolution. No wonder our 21stcentury still embraces all the kinds of crime, exploitation, brutality and ignorance that existed in the past. It is said that today man has greater control over nature, yet he transforms it into increased pollution, noise and traffic congestion. If such power reflected true progress, whoever drives a car at high speeds, or navigates the internet, would be wiser than Socrates.

In the meantime, no doubt, there is material progress. The most obvious examples are running water and electricity. Gross Domestic Product (GDP) measures this side of life and it is easy to agree that a society where GDP is growing will be better equipped to satisfy the necessities of its citizens than a country where stagnation keeps the populace living from hand to mouth.

So why do some countries grow and others not? Or more specifically, why does growth in Brazil remain low compared to China and India? The three countries experienced an acceleration of GDP after 1993. It seems that, in all three, the increase in growth was linked to export performance. But the comparative advantages of the three countries are very different. Does that matter for growth?

To grasp an important difference between Brazil, China and India, it is worth noting the composition of GDP. Today, the participation of agriculture in Brazil’s GDP is 5 percent compared to 13 percent in China and 18 percent in India. Urbanization is more advanced in Brazil than in China or India. And yet, the proportion of manufactured exports as a percentage of total exports is more than 90 percent in China and around 70 percent in India, but barely reaches 50 percent in Brazil.

Comparing these metrics across the three countries points to distinct comparative advantages and this is reflected in the composition of their exports. Brazilian agricultural exports are so important (despite the small share of value added from agriculture in GDP) because the country has a comparative advantage in agriculture. This is the result of abundant water, vast extensions of arable land, an efficient system of large scale production and research organizations that disseminate methods for achieving two crops a year.

As a consequence, the Brazilian commodities exporting sector has led growth following the positive trade shock that began in 2004. In contrast, an authentic industrial revolution lies behind Chinese growth, while in India the informatics revolution – both software development and the provision of services – is the big star that attracts investment and defines the corporate profile of the country.

The first half of 2007 looked like a promising moment for Brazil. The increase in Brazilian agro-business exports has been extraordinary. By 2020 international trade in biocombustibles is expected to be 25 times larger than today. Such expectations and the recent export boom have led to income growth. Investment in agro-business and minerals was followed by investment in the industrial sector and in the rest of the economy. From the beginning of 2006 to mid-2007, industry created more jobs than other sectors. This was due, in part, to its relative size and to the fact that the industrial sector is more labor intensive than agriculture. But it seemed possible that the benefits of increases in the prices of commodities, such as alcohol and steel, were spreading to all sectors.

The recent volatility and decline of commodity prices have brought back old questions. Is Brazil excessively dependent on the behavior of commodity prices? As these prices fall will growth evaporate in 2008?

Comments

Stories