World Economy

Brazil an Unusually Closed Economy

Brazil an Unusually Closed EconomyBrazil an Unusually Closed Economy

According to traditional macro-level measures of trade penetration (share of exports and imports in GDP), Brazil is an unusually closed economy. For Brazil this measure was only 27.6% in 2013 – a figure among the lowest in the world. Notably, Brazil’s trade openness lags far behind its peers among the BRICS countries, all of which reached trade-to-GDP ratios of at least 50% in recent years, Business Insider reported.

As the comparison with other large economies already indicates, this argument does not hold up to close scrutiny. While it is true that large economies tend to exhibit lower percentages of exports and imports to GDP, this feature fails to explain the exceptionally low levels of trade penetration observed in Brazil.

Looking at 2013 data from 176 countries available through the World Bank’s World Development Indicators (WDI) database, the average trade-to-GDP ratio is 96%. Even among the six countries with a larger economy than Brazil, the average is 55%.

Using the same WDI data and running a simple, univariate OLS regression of trade penetration and GDP on all available countries, we can show that less than one-sixth (15%) of Brazil’s deviation from the mean can be explained by the size of its economy alone. In other words, just looking at size of GDP we would expect Brazil to have a trade-to-GDP ratio of 85% – three times the observed 28%.

  Controlling GDP

Conducting a multivariate OLS regression controlling for GDP as well as other dimensions of country size (surface area and population), Brazil’s lack of openness still cannot be adequately explained – Brazil’s expected trade-to-GDP ratio in this model is still about twice the actual value (62%). Controlling for other structural features often associated with trade openness – such as the urbanization rate and the share of GDP produced in the manufacturing sector – even increases the expected openness slightly to 64%.

The only approach we discovered to fairly accurately predict Brazil’s low level of openness is by also controlling for whether or not a country is located in Latin America and the Caribbean. This comes in as a significant negative factor, reducing Brazil’s predicted openness to 31%. However, all this tells us is that Brazil is not alone – other Latin American countries also have a low trade penetration relative to the rest of the world (controlling for size and other characteristics).

  Micro-Level Indicators

A more interesting perspective on Brazil’s lack of trade openness can be obtained by looking at the number and characteristics of exporting firms.

The first result is that very few Brazilian firms export. The share of exporters among all formal-sector firms is less than 0.5%. Indeed, the absolute number of exporters in Brazil – less than 20,000 – is roughly the same as that of Norway, a country of just over five million people compared to Brazil’s 200 million. This means that, while in Norway there is one exporting firm for about every 250 Norwegians, the ratio in Brazil is one for every 10,000 Brazilians.

Of course, Norway and Brazil are vastly different countries. Norway is one of the richest countries in the world; its GDP per capita is almost ten times that of Brazil. Norway’s total GDP is about a quarter of Brazil’s, indicating that Norway can be more aptly described as a small open economy.

Norway is also a small country close to and well connected with many more countries in its region compared to Brazil. On the other hand, Norway is also a commodity exporter, with the petroleum sector accounting for more than half of total exports. In the case of Norway, a strong natural resource sector appears to coexist with value chain integration and dynamic exporters in other sectors.

Looking at a larger set of countries, we observe that Brazil is indeed an outlier. Brazil’s number of exporters relative to the population is low even when controlling for GDP per capita.