Strong demand for Brazilian products like coffee, steel etc. also drives up the value of Real, making other exports expensive and increasing purchasing power and effecting trade deficit. Inflation in Brazil can be primarily blamed on the poor supply side services.
Brazil today seems to be a costly and an over hyped economy. Restaurants in Sao Paulo are pricier than those in Paris. Apartments in posh localities of Rio cost more than those in prime locations in New York. Local prices are so very high that the visitors from richer nations find Brazil extremely expensive. Clearly something is severely wrong if cities like London and Paris, having PPP adjusted GDP more than 2.5 times that of Rio and 1.5 times that of Sao Paulo, are being found to be more affordable than the Rio and Sao Paulo.
CURIOUS CASE OF BRAZIL
Brazil is seen often in the same light as other major emerging economies like India and China, especially as a part of BRICS Nations. There has been a tendency to compare the decision of Rio to host 2016 Olympics with the 2008 Beijing Olympics with regard to the expenditure and the consequent economic benefits achieved from the event. It becomes important to understand the stark differences between Brazil and China.
China surpassed USA as Brazil ' s leading trade partner, and this makes them opposite in economic respect. Unlike China and India, Brazil ' s interest rates are very high, currency overvalued; spending is skewed towards welfare and less towards infrastructure. Productivity grew at 0.2 % compared to 4 % in China, which shows China has been putting more people to factories and investing heavily in better equipment, better roads, and efficiency. Productivity in India grew at close 3 %.
Brazil also suffers from shortage of workers and engineers and a visible decline in manufacturing and services standards. High cost of labor and transport is a direct result of investing too little in infrastructure. China ' s total investment has increased to 50 % of the GDP and Brazil at 19 % has one of the lowest rates in emerging world. Spending on new infrastructure, roads, railways, and ports is just 2 % of GDP. Poor warehousing and roadways and lack of modern cargo movement facilities are common features of the economy and have been a critical cause of high inflation. Such low investment rates not only lead to inefficiencies but also make the economy extremely vulnerable to high inflation. The supply chain of Brazil is ageing and incompetent to cater to the demands of the economic giant it dreams of becoming. The supply side inflation has been crippling the economy.
Considering the above facts and the three way deadlock, Brazil faces considerable odds in becoming a high growth economic power.
The World Cup and the Olympics provide Brazil the opportunity for getting huge investments and it will be a challenge for the Government to keep interest rates low and currency cheaper. The development of infrastructure in China especially before the Olympics was carried out by the government and huge amounts of funds were put into the purpose without much concern for the finances. The extremely high interest rates in Brazil reduce the attractiveness of private investments in long term infrastructure projects in Brazil.
HOSTING THE MAMMOTH EVENTS
The vigorous competition between nations to host the mega-events like the FIFA World Cup and Olympics is driven primarily by the lure of the vast economic windfall expected which can revitalize host economies. But the huge investments required to support the infrastructure for such events raise the questions of whether the economic benefit outweighs the costs incurred and also the opportunity cost of the investments in setting up sporting infrastructure.
Considering only the financial impact of the games does not provide a balanced view of the overall economic impact of the games. The complete economic impact is seen over several years and can be broadly categorized into three phases: pre-games phase, games phase and post-games phase.
Pre-games Phase: The key benefit that the host nation gains is boost in construction activity. In order to host event of such magnitude it is a must to not only develop world class sporting facilities but also infrastructure to accommodate smooth handling of several tens of thousands people coming to the host nation during those few weeks. This is the phase Brazil is in now. The investment in infrastructure is the key to deliver world class events like these.
Games Phase: Apart from the revenue from the ticket sales, TV rights and other such revenue related to games directly, there are also benefits from the consumption of goods and services of the host nation by the huge volumes of the tourists. The number of tourists for the London Olympics was about 8.8 million and for the South Africa World Cup was over 3 million.
Post-games Phase: Global publicity during the games and the infrastructure development that takes place ensures high tourism for years to come. The boost to international reputation that such huge events provide is also very critical in attracting foreign capital for years to come. Creating international reputation was one of the major reasons for Mexico City, the first Latin American city to host Olympics. These events provide opportunity for emerging economies to make a statement at international level and state their new status as economic giants.
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