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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 21st century 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?

73 Responses to “Brazil, China and India – Comparative Advantages”

H.GeorgeAugust 24th, 2007 at 12:44 pm

The story seems to suggest that countries with comparative advantages in agriculture growth less.   Maybe. Sachs and Wagner 1995 and followers, and Prebisch et al. and predecessors.  But from current situation, it seems that Argentina and Uruguay, which have high comparative advantages in agricultural than Brazil, manage to growth at more “Asian” rates.  Maybe there is something different and specific in Brazil, like, high real interest rates; actuarial public deficit in social expenses; high contingent -non registered- public debt; infraestructure deficit in energy, transport; human capital deficit because of low and inneficcient education and health care; captured regulators; low quality of judicial system; crazy political system without minimun party identities and loyalties; etc.

AnonymousAugust 25th, 2007 at 9:12 am

Another post on this blog – by Canuto, on dutch disease – argued that specialization in agricultural goods may carry a larger scope for incorporating high technology, skilled labor and value added.

AnonymousAugust 27th, 2007 at 7:58 am

Very interesting commentary. I still do not fully understand why Brazil is growing much more slowly than China, India and even Russia.

Nouriel RoubiniAugust 28th, 2007 at 12:19 pm

Eliana, this is an excellent contribution. A few questions: do you see the rise in commodity prices as a semi-permanent phenomenon? If so do you believe that under that scenario the growth prospects for Brazil are very good? If so could Brazil reduce its export exposure to commodities and increase its share of manufactured exports if commodity prices stay high? If yes how? Could it remain stuck with excessive exposure in commodities and risk a Dutch Disease? If not why not?

Tom TrebatAugust 29th, 2007 at 7:15 pm

A recent NBER article purported to show that the rate of investment in China is so high (40%+ of GDP) because the rate of return on capital actually is high. In Brazil, the rate of investment is extremely low – about 17-18% of GDP even allowing for some increase recently. By the same logic, can we conclude that the rate of return to investment (net of taxes) in Brazil must be too low to permit a higher rate of GDP growth? Thanks for your article.

BryceJanuary 18th, 2009 at 9:57 pm

very interesting way to look at things. very well described. I think the same way as the last poster on this one. Brazil may be growing slower than Russia, China and India because of the Eco. boom 30 yrs ago.

GrabsackApril 13th, 2012 at 9:44 am

If I was your friend, I would tell you it was good, but I'm not your friend, if you know what I mean

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