Trade, Growth and ... Brazil

In a recent address on global growth and Canadian export prospects to the Economic Club of Canada, the Bank of Canada’s Tiff Macklem noted that Canada’s share of world trade has been in decline for over a decade and that the loss of global trade share has been the second highest of the G-20.  Given that exports account for about one third of our GDP, this has implications for our future standard of living.  Moreover, it will also be reflected by our weight in the world economy.  As the accompanying figure shows, as a share of the world’s GDP, Canada has been marked by a declining share of the world’s economic output.  Compare that economic performance, on the other hand to that of Brazil – which has expressed outrage that Canada has violated its sovereignty by allegedly engaging in economic espionage.

Canada and Brazil have both been having a tough time when it comes to their relative global economic performance. Canada and Brazil have both seen a decline in their share of world output over the last thirty years.  In 1980, Brazil’s economy accounted for 4 percent of world GDP while Canada accounted for 2.5 percent. By 2013, Canada’s share had declined to 1.8 percent while Brazil’s had declined to 2.8 percent.  Given their common economic strengths in the areas of aircraft manufacturing, forestry, and mining they should each be keenly interested in what the other’s industries are doing.  They are after all both competing for world export share.  In Canada’s case, Brazil is also a top destination for new export opportunities, which again would make them a focus of our interest.  Of course, the recent economic espionage caper involving Canada could have unfortunate consequences in this regard.

If Canada is seeking economic intelligence about Brazil, it should focus on the following. While both countries have seen a decline in their world share of economic activity since 1980, Brazil has stabilized since 2000 while Canada has continued to decline.  What is Brazil doing that we are not?  Based on Macklem’s analysis: 1) they could be trading with countries that are growing faster than the global economy 2) they could have faster productivity growth 3) they could have a product mix that is more closely matched to world demand. Naturally, if they are more effective competitors, it should ultimately be reflected in their per capita GDP growth.  While our per capita GDP in US PPP dollars is still much higher than Brazil’s, since 2000, Brazil’s has grown 74% while ours has grown 46%. In this regard, they have been doing better over the last decade.

Comments

[Paul Friesen]

I don't think that we should be looking for policy differences to account for the differences in growth rates between Canada and Brazil. For the last 50 years, the global economy has had 3 basic groups of countries - rich, industrialized ones, poor, unindustrialized ones, plus a group in the process of transition between the two, where industry and incomes are rising rapidly. Brazil is one of the countries currently making that transition. We can expect its growth to slow as it joins the club of rich countries of which Canada is already a member.

This pattern can be easily produced in models where industry forms clusters, as in the new economic geography literature. Rich countries are just the ones fortunate enough to already have industrial clusters. Poor ones are just the ones that got left out as the clusters formed. As the world as a whole gets richer, demand for industrial goods rises faster than that for the primary goods on which unindustrialized countries depend, driving up the prices of industrialized goods and slowly forcing industry into previously unindustrialized countries.

During the transition phase, countries become very attractive to industry because the newly forming clusters have cheap labour. That is why countries like China and Brazil grow so fast. As labour costs become similar to those in rich countries like Canada, this advantage disappears and growth rates slow. No need to look for policy differences.

[Odie]

Would that declining share not an expected outcome when more countries are developing, thus world trade and GDP are growing? How would that figure look like with nominal trade numbers?

[Livio Di Matteo]

Odie:
Good question. According to the Bank of Canada speech I've referenced, Canada's share of world trade has declined. Don't have numbers for Brazil.

[genauer]

The growth differential for TFP follows the standard model = beta *ln(GDP) (like GS Paper Nr. 99) with textbook precision

beta here 1.2-1.3%, GS assumption 1.5%

[Odie]

Livio,

I did some rough calculations to see how those numbers really pan out:

world GDP: 1980: $18.8T 2012: $71.8T
Trade share nominal (from graph * GDP): Brazil 1980: 0.75T 2012: 2.0T Canada: 1980: 0.47T 2012: 1.2T

Canada's nominal world trade did not grow as much as Brazil's but it is not far apart. It gets even better when you look at it on a per capita basis:

population Brazil 1980: 119 million 2012: 195 million
population Canada: 1980: 24.5 million 2012: 33.5 million
per capita world trade: Brazil 1980: 6,300 2012: 10,250 Canada 1980: 19,000 2012: 35,800

Again, very similar and Brazil still has a lot of catching-up to do. Not sure if I would ring the alarm bells just yet.

[Odie]

I also read the whole speech and find its message a bit questionable. The real problem as he mentioned almost in passing is that the business sector despite healthy balance sheets is not investing. His solution is to promote world trade to pick up demand which will entice businesses to invest again. In principle he is suggesting foreign countries should fix Canada's economic growth problems by running a trade deficit towards Canada. Does that sound like a feasible strategy to enhance Canada's growth?

On the other hand, he acknowledges how detrimental the recession was to Canada's exports and therefore business sector and GDP. The conclusion I get from his intro would actually be to be LESS reliant on exports. His solution may also not pan out as he wishes: Germany has a huge trade surplus but its businesses still do invest much less than they are capable of. The same was true for Japan for most of the last decade. It looks like businesses in mature economies will just not invest as much when they have doubts about future domestic demand. Increasing that may have much more leverage and will actually be within control of the Canadian government unlike foreign sector demand.

[Jacques René Giguère]

Livio: Be wary of ratios. As I say to my students: "In this cold and cruel world, numbers are your only friends. But ratio will break your heart."

[Livio Di Matteo]

Jacques:
That sounds like very sage advice.

Odie:
That is an interesting point about business not investing. There has been this ongoing debate about companies in Canada sitting on cash - the so called "dead momney" quote made by Mark Carney. I think despite the constant reminders from the government about Canada doing better than the G-7 during the last recession, Canadian firms are not that confident about the economy which is why they are not investing.

[John]

Brazil happened to grow fast because of the policies adopted in the 90 s (ie independent central bank with inflation targeting, privatization of some national industries which led to a massive increase in productivity in the mining secto, etc) combined with China's appetitte for minerals and commoditties in general. In terms of productivity, Brazil rarely moved. The educational system still weak (does anybody know any relevant brazilian university - or upcoming?). Brazil has also a much younger population than Canada. The jump in per capita gdp is more than expected since brazilian inflation was controlled. With controlled inflation, the poor and young share of the population started to buy goods. So no suprises here. However, as you can see now, Brazil has hit on a wall. The before marginalized poor population is in the economic circuit, in debt. Consumption is slowing down. Brazil has no gains in productivity. Investment is very low and the governnment is an active player with a winner's pick policy and crony capitalism. Brazil grew less than 1% last year and it will probably grow around 2% this coming. Brazilian have definitely not done their homework while China, India and Russia are starting to experience a strong growth path.

Brazil is supposed to converge in economic terms to Canada. However this is a distant reality.

[Odie]

Livio,

I was just repeating what Macklem stated in his speech:"In the past year, net exports and investment made no contribution to growth. Conditions are propitious for business investment to accelerate. Corporate balance sheets are exceptionally strong, and corporate borrowing rates remain very low, even if they are off their troughs. But investment is unlikely to accelerate until businesses are confident that demand is picking up. The key is exports."
http://www.bankofcanada.ca/wp-content/uploads/2013/10/remarks-011013.pdf

Canada is not alone in the problem of business sector not investing. US companies sit on about 2 trillion dollar in cash. As already mentioned, Japan and Germany have similar imbalances. The problem I see is that the return in the financial markets has been better than the return from business investing. This has led to financial sector growth outstripping productivity growth in the "real" economy. Although that bubble popped in 2008 it looks like we are following the same pattern again. My suggestion would be to implement policies that make investment in production capacity more lucrative than investment in financial markets until that imbalance has been resolved. But of course, if e. g. capital gains are taxed lower than actual income like in the US things are going to continue like they have.

Regarding ratios: Just looking at a per capita basis Canada's world trade share should be ~0.5 %. Brazil is actually very close to its target value from that perspective.

[Lincolnomics]

Engineer's new model of economics takes on free trade theory:

http://www.reddit.com/r/economy/comments/1i47uy/lincolnomics_as_the_big_fix/

[ninja cookbook]

I do trust all of the ideas you have offered for your post. They're really convincing and will certainly work. Nonetheless, the posts are very quick for novices. May you please prolong them a little from next time? Thanks for the post.

[westslope]

Apologies for arriving late to this post.

If neither Brasil or Canada pretend to be significant military powers, what is importance of global GDP share? Is this growth ideology gone off the rails? Is the Old Testament an important actor here? Would Canadians have been better off with much higher population growth?

Many of the wealthiest countries have small stable populations.

I can think of a couple of reasons why Canada would want to spy on Brasil. For the longest time, we were in a wealth-destroying, profit-shifting game with regards to commuter planes. Given the structure of both economies, future profit-shifting games are likely.

These days, some Canadian firms are investing in the upstream oil sector in Brasil and are at risk of hold up because of increasingly nationalistic and protectionist policies under President Dilma. In passing, Brasil has deliberately slowed the pace of offshore oil exploration and development through these policies and discouraged many multi-national oil companies from participating.

Good or bad? I dunno. Growth can be hard to manage and so catering to special interest groups can be potentially beneficial by slowing the rate of growth of the economy and the social welfare transfers.

Besides, the received wisdom in North America is that "these people" would be far less happy if they were as materially wealthy as we are.