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Agribusiness, pandemics and the world economy

The complete text is also available here.

 

The uncertain and painful days and months that we now live – the world lives – with the covid19 pandemic and all its unfolding events take us to varied and worrying reflections. We do not know the crisis duration, whether it will come to an end, whether we will be able of working together – in collaboration – to overcome it or whether we will otherwise fiercely fight each other over the so many threats and opportunities that the crisis carries with it.

 

In the early 20th century, an outbreak of yellow fever in Rio de Janeiro had already indicated how the costs of socioeconomic and political (dis)organization already affected disproportionally the marginalized share of population. Both the script and the actors in that tragedy are similar to the current ones. In 1918, the “Spanish Flu” took lives of thousands of Brazilians. We did not even have a Ministry of Health, although it is not enough to have it, as we well know. However, even after a century of advances, our health system is still fragile – in fact, they are flaws of our socioeconomic system. Brazil needs to implement a huge agenda of economic reforms in almost every area of activity, focusing on strengthen the economic growth, distributing its results, pushing up population welfare at levels compatible to the resource potential that Brazil has.

 

Brazil is not a newbie when it comes to crisis or great world transformations. Until the public sector´s industrialization effort intensified in the 1930’s, we had lived in farming related economic cycles.

 

Brazil lived the cycles of redwood (“pau-Brasil”), sugar (16th to 18th century, from Northeast to the Southeast) and of gold and mining in the Central-West (18th century). Brazil did as told to by Europe. The domestic market agriculture followed the migration of these leading activities, ensuring food for those employed in these activities and their families.

 

Throughout the 18th century, the cotton market expanded, following firm footsteps of the English Industrial Revolution. As for coffee, after migrating around Brazil found in Sao Paulo its greatest producer by 1880. The global demand increases substantially due to the popularization of coffee among American industry workers. Coffee had brought capitalism to the countryside, as the slow process of abolition (imposed from outside) and fast immigration of Europeans and Orientals. They were transforming Brazil with the culture and human capital they brought along. A strong synergy arises in business, encouraging investments in the railway infrastructure, mainly around coffee, directed to exports and funded by foreign capital. Research starts to advance as IAC (Campinas´ Agronomic Institute) is created. By the end of the 19th century, rubber was prospering in the North, aligned with the emergence of tires with the automobile industry, until it lost competitiveness to Asia and Africa.

 

In 1900, the Brazilian public sector was relatively small, contented with a tax burden at around 10%. In that year, 45% of the GDP came from farming (not counting the agroindustry), which occupied 52% of the Brazilian population; the industry contributed with only 10% of the GDP (mostly based on farming raw materials). The coffee crisis had started in that period: the enthusiasm about production already pointed to a surplus. The international price decrease was not fully transferred to producers because of exchange rate devaluations and public support programs to coffee, a sector that had conquered sizable weight in policymaking.

 

In 1930, when the global crisis had broken out, Brazil was accumulating huge unsalable coffee inventories. The government, or better said, the society, had to absorb (to waive) 50% of coffee growers’ debts. Moreover, from 1931 to 1944, the government purchased 100 million coffee bags (38% of the production accumulated in the period), of which 80% were burnt. Almost everything was financed by issuing money. The fiscal impact was small: the tax burden went from 12% to 15% in the 1930’s. This monumental support to coffee injected enough resources to stimulate the whole economy, which was yet favored by currency devaluations and restrictions to imports. This powerful policy package led to the economic recovery already in 1932. The Brazilian government action would later be interpreted as a Keynesian experiment before the great economist book was published. From 1929 to 1931, the Brazilian GDP decreased at an accumulated rate of 4.3%; the industry, at 7.7%; farming, at 4.9%. In the next three years (1932/34), accumulated rates were positive: 24%, 26% and 26%, in spite of decreases in both exports and foreign investments. From 1929 to 1933, the accumulated deflation was 13%. Between 1933 and 1937, inflation hit 20%. In the United States, where the crisis had started and where there had been a delay to adopt pro-growth measures, production would only return to the pre-crisis level in 1937.

 

As it normally happens, incentive measures did not moderate after the recovery came about. Mainly due to the impressive power to overcome the crisis demonstrated by the government. In Brazil, already under the Varga’s authoritarian regime, there were conditions to impose a great national project: making the dream of transforming Brazil in an industrialized country come true. The industry went through an accelerated growing process that lasted up to 1980 –, evolving from 15% to 35% of the GDP, benefitting from both domestic (drawn from agriculture) and foreign (external investment and borrowing) savings. The expansionary monetary policy occurred through extra-budgetary spending, using official banks and state companies, although the tax burden came to increase from less than 15% to 25% of the GDP, constituting an apparent (disguised) fiscal responsibility. The inflation followed an accelerated process in the coming decades: 10% per year in the 1940’s, more than 20% in the 1950’s, more than 40% in 1960 and 1970’s, and it continued to grow, hitting more than 500% per year in the 1980’s.

 

In the 1960’s, credit, prices and science and technology programs were implemented and kept in the following decades. Two decades later, these programs were growing and producing results (higher supply at more accessible prices and larger exports), and the inflation could be controlled with Plano Real in 1994. Then, strict monetary control and a significant tax burden increase appeared to substitute the inflationary tax, which was not enough, however, to contain the public debt increase. Income transfer programs – large real increases of minimum wage and the Family Grant (“Bolsa Família”), for instance – became viable because the increase in demand for food (that they generated) was met by the agribusiness at stable or decreasing prices.

 

From those years on, therefore, the agribusiness has shown maturity, increasing based on productivity. In fact, productivity, after years of stagnation and decreases in the post-war period, had started to increase significantly from the 1970’s. The investment of the society´s resources was so efficient that, in the 1990’s, the support to agribusiness (through credit, prices and insurance) practically disappeared. Currently, the public support to farming is only 1.1% of the Gross Production Value, while the world average is 16%. Still, since the 1990’s, there has been a real price decrease to producers and significant achievements in the international market. From 1995 to 2019, the farming GDP increased 130%, and the Brazilian one, 70%. The industry GDP, practically stagnated since 1980, rose only 33% from 1995 to 2019. Real farm prices downed 40% to producers, while to consumers, real food prices practically did not change.

 

In 2008, an international financial crisis surprised Brazil again. It started in the real state sector in the United States and dragged the financial system to a major crisis. In the US, the GDP decreased 0.3% in 2008 and 3.6% in 2009. Help came through a huge injection of resources from the society: US$ 800 billion from the government to help banks and US$ 4.5 trillion from the Federal Reserve to buy private companies’ debt bonds. In Europe, which was hit by US crisis spillover, the help amounted US$2.2 trillion and, in China, US$ 600 billion. Brazil, which had been growing at 3.7% per year in that decade, registered a slight decrease of 0.3% in 2009, but was recovering in 2010, at a 7.3% rate.

 

The Brazilian recipe to overcome the recession was, from one year to the other, apply a fiscal stimulus of almost 3% of the GDP (roughly US$50 billion) and a credit expansion of 14% (US$ 100 billion). The stimulus, unfortunately, continued even after the recovery, becoming unnecessary: primary fiscal surpluses were decreasing until they became deficits from 2014 onwards. These pro-growth measures were becoming less efficient as the public debt started to be seen as significantly risky and the population ended up heavily indebted. Corruption plus a deep political crisis, as well as the beginning of restrictive macro and sectoral measures to fix the economy completed the scenario to put Brazil in two recession years (2015 and 2016), followed by negligible growth since then. Unemployment and informality reached shocking levels.

 

It is in this scenario that we experienced the new impacts of a global crisis, when covid-19 bursts in Brazil in 2020. Its impacts on economy are, at first, the result of the prevention measures. It is a very significant negative shock on demand that, if lasts for a long time, can affect most of companies, taking many out of the market, worsening unemployment. For the time being, there is no complete accounting about these highly damaging consequences. Moreover, the severe demand decrease may affect the productive capacity of economy. It will hardly be observed a return to the previous path after we surpass the pandemic when and if that occurs. In other words, there is a supply shock in response to a demand shock, which can aggravate and prolong the economic crisis.

 

As for agribusiness, if negative impacts occur, they will not be big or generalized. Farmers make the decision months before the output is available in the market. Moreover, the sector’s highs and lows are little related to the whole economy cycles, the opposite of what occurs for industry and services. In a few cases, a recession for economy as a whole is followed by a recession for farming. Food is an item of inelastic demand regarding both price and income. During the pandemic, substantial production and supply problems are not expected; however, there might be problems in processing stages, something to be watched over.

 

Due to the severe fiscal crisis in the public sector, exceptional and unorthodox resources must be used, not quite different in nature from those used in 1930’s. However, the Brazilian social structure is so damaged that the adequate help to population in need is extremely difficult and inefficient. A fiscal worsening is indeed expected; however, we do not know how deep it will be, because both the duration of the pandemic and the volume of resources necessary to repair socioeconomic conditions while it lasts are unknown.

 

Despite so many uncertainties, we watch some experts risking forecasts for the coming months and years: we will see a V recovery, say the optimistic, a U one, the cautious and, an L recovery, the pessimistic who do not see it on the horizon. Covid-19 unveils all deviations and consequent fragilities of humanity. In Brazil, these fragilities are alarming because of poverty, inequality and informality. Is it time to give up or to transform the ways each society has chosen to organize itself in order to survive? Depending on how transformations occur will be consequences of the next pandemic or pandemics the future holds in store.

 

Sooner or later, everywhere all of this will happen one way or another. First movements will take place in a scenario in which the surprising China matures – unveiling a closed political system and a weird economic one, that is, contradictorily, centralized and capitalist at the same time. The country disturbs, and is confronted by, the US, having a mercurial leader at the moment, but, in the mid-term, will inescapably be under structural transformations in the generation and distribution of wealth and in citizens’ rights (spilling itself over much of the world). Will both giants find a formula for sharing power and influence in global terms? Or will a – cold or hot – conflict be necessary until one of them prevails?The uncertain and painful days and months that we now live – the world lives – with the covid19 pandemic and all its unfolding events take us to varied and worrying reflections. We do not know the crisis duration, whether it will come to an end, whether we will be able of working together – in collaboration – to overcome it or whether we will otherwise fiercely fight each other over the so many threats and opportunities that the crisis carries with it.

 

In the early 20th century, an outbreak of yellow fever in Rio de Janeiro had already indicated how the costs of socioeconomic and political (dis)organization already affected disproportionally the marginalized share of population. Both the script and the actors in that tragedy are similar to the current ones. In 1918, the “Spanish Flu” took lives of thousands of Brazilians. We did not even have a Ministry of Health, although it is not enough to have it, as we well know. However, even after a century of advances, our health system is still fragile – in fact, they are flaws of our socioeconomic system. Brazil needs to implement a huge agenda of economic reforms in almost every area of activity, focusing on strengthen the economic growth, distributing its results, pushing up population welfare at levels compatible to the resource potential that Brazil has.

 

Brazil is not a newbie when it comes to crisis or great world transformations. Until the public sector´s industrialization effort intensified in the 1930’s, we had lived in farming related economic cycles.

 

Brazil lived the cycles of redwood (“pau-Brasil”), sugar (16th to 18th century, from Northeast to the Southeast) and of gold and mining in the Central-West (18th century). Brazil did as told to by Europe. The domestic market agriculture followed the migration of these leading activities, ensuring food for those employed in these activities and their families.

 

Throughout the 18th century, the cotton market expanded, following firm footsteps of the English Industrial Revolution. As for coffee, after migrating around Brazil found in Sao Paulo its greatest producer by 1880. The global demand increases substantially due to the popularization of coffee among American industry workers. Coffee had brought capitalism to the countryside, as the slow process of abolition (imposed from outside) and fast immigration of Europeans and Orientals. They were transforming Brazil with the culture and human capital they brought along. A strong synergy arises in business, encouraging investments in the railway infrastructure, mainly around coffee, directed to exports and funded by foreign capital. Research starts to advance as IAC (Campinas´ Agronomic Institute) is created. By the end of the 19th century, rubber was prospering in the North, aligned with the emergence of tires with the automobile industry, until it lost competitiveness to Asia and Africa.

 

In 1900, the Brazilian public sector was relatively small, contented with a tax burden at around 10%. In that year, 45% of the GDP came from farming (not counting the agroindustry), which occupied 52% of the Brazilian population; the industry contributed with only 10% of the GDP (mostly based on farming raw materials). The coffee crisis had started in that period: the enthusiasm about production already pointed to a surplus. The international price decrease was not fully transferred to producers because of exchange rate devaluations and public support programs to coffee, a sector that had conquered sizable weight in policymaking.

 

In 1930, when the global crisis had broken out, Brazil was accumulating huge unsalable coffee inventories. The government, or better said, the society, had to absorb (to waive) 50% of coffee growers’ debts. Moreover, from 1931 to 1944, the government purchased 100 million coffee bags (38% of the production accumulated in the period), of which 80% were burnt. Almost everything was financed by issuing money. The fiscal impact was small: the tax burden went from 12% to 15% in the 1930’s. This monumental support to coffee injected enough resources to stimulate the whole economy, which was yet favored by currency devaluations and restrictions to imports. This powerful policy package led to the economic recovery already in 1932. The Brazilian government action would later be interpreted as a Keynesian experiment before the great economist book was published. From 1929 to 1931, the Brazilian GDP decreased at an accumulated rate of 4.3%; the industry, at 7.7%; farming, at 4.9%. In the next three years (1932/34), accumulated rates were positive: 24%, 26% and 26%, in spite of decreases in both exports and foreign investments. From 1929 to 1933, the accumulated deflation was 13%. Between 1933 and 1937, inflation hit 20%. In the United States, where the crisis had started and where there had been a delay to adopt pro-growth measures, production would only return to the pre-crisis level in 1937.

 

As it normally happens, incentive measures did not moderate after the recovery came about. Mainly due to the impressive power to overcome the crisis demonstrated by the government. In Brazil, already under the Varga’s authoritarian regime, there were conditions to impose a great national project: making the dream of transforming Brazil in an industrialized country come true. The industry went through an accelerated growing process that lasted up to 1980 –, evolving from 15% to 35% of the GDP, benefitting from both domestic (drawn from agriculture) and foreign (external investment and borrowing) savings. The expansionary monetary policy occurred through extra-budgetary spending, using official banks and state companies, although the tax burden came to increase from less than 15% to 25% of the GDP, constituting an apparent (disguised) fiscal responsibility. The inflation followed an accelerated process in the coming decades: 10% per year in the 1940’s, more than 20% in the 1950’s, more than 40% in 1960 and 1970’s, and it continued to grow, hitting more than 500% per year in the 1980’s.

 

In the 1960’s, credit, prices and science and technology programs were implemented and kept in the following decades. Two decades later, these programs were growing and producing results (higher supply at more accessible prices and larger exports), and the inflation could be controlled with Plano Real in 1994. Then, strict monetary control and a significant tax burden increase appeared to substitute the inflationary tax, which was not enough, however, to contain the public debt increase. Income transfer programs – large real increases of minimum wage and the Family Grant (“Bolsa Família”), for instance – became viable because the increase in demand for food (that they generated) was met by the agribusiness at stable or decreasing prices.

 

From those years on, therefore, the agribusiness has shown maturity, increasing based on productivity. In fact, productivity, after years of stagnation and decreases in the post-war period, had started to increase significantly from the 1970’s. The investment of the society´s resources was so efficient that, in the 1990’s, the support to agribusiness (through credit, prices and insurance) practically disappeared. Currently, the public support to farming is only 1.1% of the Gross Production Value, while the world average is 16%. Still, since the 1990’s, there has been a real price decrease to producers and significant achievements in the international market. From 1995 to 2019, the farming GDP increased 130%, and the Brazilian one, 70%. The industry GDP, practically stagnated since 1980, rose only 33% from 1995 to 2019. Real farm prices downed 40% to producers, while to consumers, real food prices practically did not change.

 

In 2008, an international financial crisis surprised Brazil again. It started in the real state sector in the United States and dragged the financial system to a major crisis. In the US, the GDP decreased 0.3% in 2008 and 3.6% in 2009. Help came through a huge injection of resources from the society: US$ 800 billion from the government to help banks and US$ 4.5 trillion from the Federal Reserve to buy private companies’ debt bonds. In Europe, which was hit by US crisis spillover, the help amounted US$2.2 trillion and, in China, US$ 600 billion. Brazil, which had been growing at 3.7% per year in that decade, registered a slight decrease of 0.3% in 2009, but was recovering in 2010, at a 7.3% rate.

 

The Brazilian recipe to overcome the recession was, from one year to the other, apply a fiscal stimulus of almost 3% of the GDP (roughly US$50 billion) and a credit expansion of 14% (US$ 100 billion). The stimulus, unfortunately, continued even after the recovery, becoming unnecessary: primary fiscal surpluses were decreasing until they became deficits from 2014 onwards. These pro-growth measures were becoming less efficient as the public debt started to be seen as significantly risky and the population ended up heavily indebted. Corruption plus a deep political crisis, as well as the beginning of restrictive macro and sectoral measures to fix the economy completed the scenario to put Brazil in two recession years (2015 and 2016), followed by negligible growth since then. Unemployment and informality reached shocking levels.

 

It is in this scenario that we experienced the new impacts of a global crisis, when covid-19 bursts in Brazil in 2020. Its impacts on economy are, at first, the result of the prevention measures. It is a very significant negative shock on demand that, if lasts for a long time, can affect most of companies, taking many out of the market, worsening unemployment. For the time being, there is no complete accounting about these highly damaging consequences. Moreover, the severe demand decrease may affect the productive capacity of economy. It will hardly be observed a return to the previous path after we surpass the pandemic when and if that occurs. In other words, there is a supply shock in response to a demand shock, which can aggravate and prolong the economic crisis.

 

As for agribusiness, if negative impacts occur, they will not be big or generalized. Farmers make the decision months before the output is available in the market. Moreover, the sector’s highs and lows are little related to the whole economy cycles, the opposite of what occurs for industry and services. In a few cases, a recession for economy as a whole is followed by a recession for farming. Food is an item of inelastic demand regarding both price and income. During the pandemic, substantial production and supply problems are not expected; however, there might be problems in processing stages, something to be watched over.

 

Due to the severe fiscal crisis in the public sector, exceptional and unorthodox resources must be used, not quite different in nature from those used in 1930’s. However, the Brazilian social structure is so damaged that the adequate help to population in need is extremely difficult and inefficient. A fiscal worsening is indeed expected; however, we do not know how deep it will be, because both the duration of the pandemic and the volume of resources necessary to repair socioeconomic conditions while it lasts are unknown.

 

Despite so many uncertainties, we watch some experts risking forecasts for the coming months and years: we will see a V recovery, say the optimistic, a U one, the cautious and, an L recovery, the pessimistic who do not see it on the horizon. Covid-19 unveils all deviations and consequent fragilities of humanity. In Brazil, these fragilities are alarming because of poverty, inequality and informality. Is it time to give up or to transform the ways each society has chosen to organize itself in order to survive? Depending on how transformations occur will be consequences of the next pandemic or pandemics the future holds in store.

 

Sooner or later, everywhere all of this will happen one way or another. First movements will take place in a scenario in which the surprising China matures – unveiling a closed political system and a weird economic one, that is, contradictorily, centralized and capitalist at the same time. The country disturbs, and is confronted by, the US, having a mercurial leader at the moment, but, in the mid-term, will inescapably be under structural transformations in the generation and distribution of wealth and in citizens’ rights (spilling itself over much of the world). Will both giants find a formula for sharing power and influence in global terms? Or will a – cold or hot – conflict be necessary until one of them prevails?

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