Globalization Impact in Brazil
Table of contents
This thesis investigates the concept of globalization and its effects on the economic, political and social development in Brazil. For many years Brazil suffered from economic instability, high inflation and high levels of income inequalities and poverty.
New reforms and opening up of domestic markets has had positive effects on Brazil in terms of stabilizing the economy. Globalization is a growing phenomenon and its effects on the world and people have been enormous. Trade liberalization has led to increased foreign direct investment inflows and it has also increased Brazil’s international trade. During the era of globalization and economic growth, Brazil has received more power within international organizations and has become an important addition to international politics.
But, even if the trade liberalization had positive effects on Brazil during the 1990s, inequality and poverty levels did not decline. This was due to the lack of functioning social policies. Governmental changes in the 21st century led to social reforms and by introducing new policies poverty levels were reduced. Today Brazil is experiencing a growing middle class and a further reduction of inequality levels. For globalization to have a positive effect on Brazil it must be controlled and the working economic reforms must be introduced.
This happened during the mid 1990s and since the beginning of the 21st century Brazil has experienced the benefits of globalization.
Globalization is a complex phenomenon that has had enormous effects on the world economy and its people.
Today, one is used to have shirts produced in Bangladesh, the coffee originates from Brazil and the camera is imported from Japan. A few decades ago the word “globalization” barely existed, but today it is a widely used expression and the effects of globalization is discussed in a great number of economic articles and journals. At one extreme, globalization is seen as a force that delivers economic prosperity to people around the world. At the other, globalization is blamed for making rich people richer and the poor poorer.
Globalization is referred to as a process of interaction and integration among people and companies, and the process of globalization have effected the environment in different countries, the culture, the people and the political systems within the economy. Globalization also has a major effect on economic development. Policy and technological developments of the past decades have stimulated international trade and investments to that extent that many believe that the world has entered a new phase in its economic development.
The current wave of globalization has been driven by policies that have opened up economies around the world and by technological developments during the past decades (World Commission on the Social Dimension of Globalization, 2004). Even if globalization in many situations has been referred to as something positive, the word globalization is a deeply controversial term. Proponents of globalisation argue that it allows poor countries to develop economically and socially.
Opponents, on the other hand, argue that globalization has benefited multinational corporations in the Western world at the expense of small, local firms and common people (de Soysa and Vadlamannati 2011). According to Kiggundu, globalization offers developing countries new opportunities and challenges such as economic, political and social development, but it also gives these countries an opportunity to reduce poverty and increase wages, and thereby adding wealth to the economy (Kiggundu, 2002).
There are several different ways to measure and define globalization, but the most used measurement methods are to divine the effects of globalization into one economic, one political and one social dimension and thereby evaluate the effects (Dreher, 2006). Globalization and internationalization are two words frequently used today. Boundaries become smaller and world trade and investments abroad are increasing. The world has 6 become familiar with terms such as ”emerging markets” and ”BRIC-countries”.
Globalization has indeed provided more opportunities for countries and their people. But, obviously countries are facing challenges in the globalization process. Globalization generally refers to an increasing interaction across national boundaries that affect many aspects of life: economic, social, cultural and political. It is a process driven by international trade and investment and aided by information technology. This process has effects on the environment as well as on political systems, and on economic development in societies around the world.
This process has speeded up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business internationally (de Soysa Vadlamannati, 2011). It is hard to say when the globalization process in Brazil started, but what one can say is that it definitely has changed Brazil, economically, politically and socially. Brazil is the largest economy in South America, and is because of its size offering one of the most promising markets in the world (Brazil Country Brief).
Brazil is, together with India and China, ranked as one of the countries that will offer the highest predicted development in the next 25 years. During the past decade, Brazil was number two of the emerging economies in the world receiving high levels of foreign direct investment. The Brazilian economy has faced some substantial changes in the past five decades. During these decades the economy also changed from being a strong state-oriented economy to a more market driven economic model.
In the 1990’s and in the early 2000’s, many market-orientated reforms within trade liberalization and privatization were made. In the beginning of the 1990’s, the country faced economic problems due to high inflation and an unstable economy. This was why the Real Plan was introduced in 1994. The plan aimed to avoid many of the problems with inflation and what it brought in terms of economic instability, and it was based on fiscal adjustment (Gouvea, 2004). In the past decades, Brazil also has attracted a large amount of foreign direct investment (hereafter denoted as FDI).
For many years FDI was restricted to certain sectors and were highly regulated. In the 1990’s, Brazil opened its doors to FDI inflow and the economy experienced an enormous growth in FDI (Baer and Rangel, 2001). When considering overall subjects for this thesis, the authors wanted to go in depth and look at the development of emerging markets as these are becoming more and more important in the global economy. During the first years of the study program, the main focus was on Asia and the development of important economies such as China and India. Therefore, we wanted 7 o focus on a different, but just as important region. South America, and in particular Brazil has shown to be an important player in the international economy, which makes it an interesting market to investigate.
The aim of this thesis is to investigate the effects globalization has had on Brazil in terms of economic, political and social development. This is a major task and it looks both at how globalization has affected the Brazilian economy and the role of Brazil in the world economy on one side, and the people of Brazil on the other.
To do this one will have to look at many different aspects of the country and its role within the world. The specific and interesting episodes from the country’s economic and political history to what role Brazil plays in the world economy, and also the importance of the Brazilian market in the world is worth noticing. What also falls under this theme is FDI in Brazil, since globalization often starts with the opening up of domestic markets to the global economy.
How is the inflow of FDI in Brazil and how has it developed during the time of liberalization? By looking into the wave of FDI-inflow in Brazil during the past decades, it will be investigated how the economic dimension of globalization has affected the political and the social structure in the Brazilian economy. It is also interesting to look at how higher FDI-inflows in Brazil has affected the poverty and the income inequalities, i. e. if the economic dimension of globalization has helped Brazil to develop socially.
Our research question is as follows: “By investigating the previous and current economical, political and social conditions in Brazil, we want to find out how it has developed during the globalization, as well as what globalization has offered. ”
Restrictions to this paper are necessary due to the scope of the paper and the limit of time. As the topic is very broad it has been necessary to narrow it down to a specific period of time. The thesis aims to investigate how the recent globalization process in Brazil has affected the economic, political and social structure in the country.
At first a definition of globalization and how globalization has affected Brazil is necessary to set the outline of the thesis. It is also necessary with an overall background of Brazil in terms of historical, economical, political and social development. To be able to make a significant analysis of the globalization process 8 in Brazil the time limit is important. Hence, the paper aims to take a look at the recent globalization process in Brazil, starting in the beginning of the 1990’s until today.
The thesis aims to bring up the problems Brazil was facing in the beginning of the 1990’s, the introduction of the Real Plan, the political development during this period and the social structures in Brazil. In addition to this, the authors will make connections between the economic development and social development in the country, to see if there is a relationship between higher FDI-rates, which derived from a liberalization of the Brazilian market, and social conditions such as poverty and income distribution.
Hence, the thesis aims to link economical, political and social development in Brazil and cannot be used for generalization to other countries. The limitation regarding the time period is necessary in this paper, but it might have dismissed different interesting topics that could have added value to our research.
This thesis aims to explain how globalization has affected the economic, political and social structure in Brazil. The first objective is to explain and define important and commonly used terms such as economic, political and social globalization.
Since a main part of the thesis is based on the economic history and development of Brazil, it is significant to define important terms. The thesis approaches the research question primarily with an explanatory approach. An explanatory study is best suited because the paper aims to understand how the globalization has affected the economical, political and social development in Brazil. The goal of explanatory research is to go beyond the traditional descriptive designs of the positivist approach to provide meaning as well as description.
The purpose of explanatory research is broader than descriptive research; it is conducted to build theories and predict events. Objectives for explanatory research include explaining why some phenomenon occurred as well as interpreting a cause-and-effect relationship between two or more variables (McNabb, 2008:100). In this paper there will be conducted an analysis of the effect the globalization process has had on Brazil and how the country has developed during the past two decades.
The research design has furthermore been of quantitative nature, using already existing research papers from organizations such as the United Nations (UN), the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). In the collection of quantitative data such as FDI-rates, poverty rates and income 9 distribution, The United Nations Conference on Trade and Development (UNCTAD) and the IMF websites have been helpful sources. The authors aim to use secondary data as the main source of information.
For this type of research approach the authors believe that using secondary data is sufficient for answering our research question. In this thesis the aim is to use existing theories and data to analyze. Most of the data has been collected through research and an extensive use of journal articles and reports from reliable sources. Hence, the authors are not aiming to explore new theories.
Literature review and previous research
The literature this thesis is based on has been gathered from various sources, which are considered recognized and reliable.
The authors have used various literatures within the subject of international business. Specific literature about foreign direct investment and globalization has been used to get a broad understanding concerning the chosen subject. The authors have been aiming at finding as recent literature as possible to get reliable information. Inspiration from respected newspapers such as The Financial Times and The Economist has proven to be helpful when exploring the subject of globalization in Brazil. Within the subject of globalization, there seem to exist different literature and well-known and respected authors.
One of these is Jagdish Baghwati, who is a professor of economics at Columbia University and known for his research within international trade. His book “In Defense of Globalization” (2004) has proven helpful in the research to get a better understanding of why globalization is positive for the world. Another important person within the liberal approach is Axel Dreher, a German economist known for the KOF Index of Globalization. This index measures mainly three dimensions of globalization; the economic, political and social dimension, which has been used as a measurement of globalization in this thesis.
The literature is mainly specialist literature about globalization, both pro and con. For the background part, literature about Brazilian history has been gathered from recognized sources such as Science Direct and Business Source Premier, which are recommended by the CBS library. The authors have also found books on Brazilian history and the development of the Brazilian economy to be reliable sources as they have been written by respected professors at well-known universities. 10 When analyzing income inequality and trade liberalization, a report written by Bergh and Nilsson has been very helpful.
According to this article, there is a positive link between income inequality and trade liberalization, but only for certain types of reforms. These are trade liberalization, deregulation of product and labor markets and economic globalization such as inflow and outflow of FDI.
This thesis consists of ten chapters. After a brief introduction where the problem is discussed and specified, the methodology approach and the delimitations are presented. Chapter two is mainly a globalization chapter where a definition of globalization is introduced.
Since globalization can be measured in many different ways, a presentation of the measurements is made in section 2. 2 to 2. 5. In chapter three, the social development of Brazil will be assessed. In chapter four, the economic and political history of Brazil will be presented. Here, the authors will review the history of Brazils economic and political development with focus on the different plans such as The Real Plan and The Cruzado Plan, but also development in terms of economic growth such as GDP.
In chapter five, the authors will evaluate Brazil as a BRIC-country, trying to get a better understanding of why Brazil has had such a strong growth the last decades and what this means to Brazil. In chapters 6 through 8 an analysis of how Brazil has been affected by globalization in terms of economic, political and social aspects will be conducted, and a discussion on this will follow in chapter 9. In the last chapter there will be a conclusion on the findings.
Definition of globalization
An extensive amount of research has been done within the field of describing globalization. According to a report from the OECD the term “globalization” refers to the dynamic and multidimensional process of economic integration within a country and can be explained by the fact that national resources are becoming more and more internationally mobile. Furthermore, globalization has for a long time been used to describe the increasing internationalization of financial markets and the different markets of goods and services.
There are mainly three forces that are contributing to the process of globalization and these are the liberalization of capital movements, the opening of global markets to trade and 11 investment, and the increasing use of information and communication technologies. Governments and international organizations have also played a very important role in the globalization of the world economy. The WTO has for example helped with making global markets more open by reducing trade barriers such as tariffs through trade negotiations, while the IMF has worked to ensure a smooth international monetary system.
Also the OECD has played an important role by liberalizing capital movements. The globalization in terms of trade in goods and services is opening up new and important markets in the world. In terms of financial markets, the increasing trade has triggered a growth in investments abroad and movements in capital over seas (OECD Handbook on Economic Globalization Indicators, 2005). As mentioned before, there are many pros and cons to globalization. Authors such as Jagdish Bhagwati and Martin Wolf argue that globalization provides economic, political and social benefits for the people in the orld. Free markets denote voluntary exchange and the allocation of goods according to supply and demand, where success and failure in the market is based on effort and talents. The ones that are skeptic to globalization fear that unfairness between people such as income inequalities and higher poverty rates will rise when the globalization process heats up. According to these people, globalization will hinder economic and social development in developing countries because it takes away the independence of governments to act in the people’s interests (de Soysa and Vadlamannati, 2011).
It seems appropriate to take a brief look at globalization versus internationalization. Although it seems like two quite similar concepts, there are important differences between globalization and internationalization. It can be said internationalization is a phenomenon that is older than globalization. It is important to note how globalization is different from internationalization. According to Daly, internationalization refers to the increasing importance of international trade, international relations, treaties, alliances, etc.
Inter-national means between or among nations. The nation remains the basic unit, even as relations among nations become increasingly necessary and important (Daly, 1999). According to Petrella, “the internationalization of economy and society refers to the ensemble of flows of exchanges of raw materials, semi-finished and finished products and services, money, ideas and people between two or more nation-states”. The mist visible instruments that are used to measure and monitor the nature, scope and direction of internationalization is 12 rade and population movement statistics. In modern capitalism, internationalization took shape through the conquest of colonies and the rise of mercantilism. George Modelski used the term “globalization” in 1972 to refer explicitly to the European-lead expansion to gain control over the communities in the world and integrate these into one global trading system. The pattern and degree of internationalization has changes over the centuries as old powers have declined and new ones emerged with different interests and strategies (Petrella, 1996:63). Globalization is as mentioned more recent phenomenon. Therefore, the forms and processes occurring are more difficult to capture in a single sentence. In short, globalization refers to the global economic integration of many formerly national economies into one global economy mainly by free trade and free capital mobility (Daly, 1999). Petrella lists some of the principal characteristics of globalization. He mentions that there is a globalization of financial markets and there is a transformation of consumption patterns into cultural products with worldwide consumer markets.
There is globalization of financial markets and there is a diminished role of national governments in designing the rules for global governance (Petrella, 1996:64). The one factor that has changed more than others is about the effect of globalization. For example, the production of wealth in countries such as Germany, France, Japan or Costa Rica is no longer dependent upon the performance of their “local” firms in local technology, capital and labour markets, but instead on those firms which are increasingly part of global networks of financial and industrial corporations.
They respond to strategic interests that are not bound to their own country’s national needs and they are even more dependent on technology designed, produced and transformed everywhere in the world, on capital made available at the global and world level, which is confirmed by the fast growing globalization of financial and capital markets. They are also increasingly dependent on highly skilled labour, not necessarily trained in their own country (Petrella, 1996:68). One can say that internationalization is a predecessor to globalization.
Internationalization seems like a Western phenomenon, the Western states were trading only with each other at some point and now the whole world is trading with each other. Globalization reaches wider than internationalization, and it also grasps a larger part of the world. More countries are involved in the global process it does not only include the more developed countries. Today globalization is hard to avoid and it affects people around the world on a daily basis. 13
According to economists David Dollar and Aart Kray, globalization has since 1980 contributed to a reduction in poverty as well as a reduction in global income inequality (Dollar and Kray, 2001). However, studies have shown that a number of people in different countries hold the view that the benefits and burdens of ”the economic developments of the last few years” have not been shared fairly. In developed countries, those who have this view of unfairness are more likely to say that globalization is growing too quickly- especially in Germany, France, South Korea, Japan and Italy.
In some developing countries, in contrast, those who perceive such unfairness are more likely to say that globalizations is proceeding too slowly. These countries include Turkey, Indonesia, The Philippines, Kenya, Brazil, Mexico and the Central America countries. When working on raising living standards throughout the world it is important to create a climate that enables countries to realize maximum benefits from globalization (BBC World Service Poll). According to Wolf, liberal globalization is a movement in the direction of greater integration, as both natural and man made barriers to international economic exchange continue to fall.
The increased impact of economic changes in one part of the world on what happens in the others is a natural and necessary consequence. In the question of the effect of globalization one has to consider what has happened within developing countries and high-income countries separately. Critics say that globalization only benefits the rich countries. An important term is capitalism and the relationship between capitalism, inequality and globalization. Does capitalism benefit all and does it lead to less inequality within societies? When looking briefly at this the focus will be on Latin America as a region. 14 Figure 1. Liberal apitalism, inequality and welfare states. Source: Schneider and Soskice, 2009 Capitalism is a social formation in which markets and commodity production are pervasive, including capital markets and labour markets. Capitalism is considered to be the most dynamic economic system in economic history. Its driving logic involves the expansion and diversification of multiple markets (Hodgson, 2003). Liberal capitalism has an impact on both the market distribution of income through labour markets, and on redistribution and the welfare state through the preferences of middle class voters, and business on the political system.
With capitalism comes a greater demand for skilled labour, which leads to a higher educated middle class. More middle class investment in the education system leads to inequality of education outcomes. This increase in education has had a major impact on labour. The focus is now on general skills, which rewards general education. However, this penalizes those with low educational competences, which in turn will lead to a more inegalitarian income distribution. Liberal capitalism leads to weaker unions since the society becomes more individualistic and no one wants to share their wealth.
The median voter from the middle-class does not want a welfare state because recipients of welfare state benefits are the poor. According to Schneider and Soskice, capitalism leads to demand for general skilled labour, which leads to increased inequalities and a minimal welfare state. 15 Keynes draws attention to the disadvantages for demand-led economic development as a result of great inequality in distribution. Too wide a distribution gap results in the rich increasingly saving up their income instead of spending it for investment purposes, while the poor lack sufficient income and thus also purchasing power.
This will lead to a decline in the general demand for investment and consumer goods and thus growth will be limited (Eissel, 2008). Research has shown that capitalism does not benefit all. Inequality has increased among what the World Bank calls the “new globalizers”, its twenty-four countries with an aggregate population of close to three billion people (Wolf, 2004:167). According to the World Bank, the “new globalizers” have approximately doubled their ratio of trade to GDP. These countries include India and China.
On the other hand, about 2 billion people live in developing countries that are trading less today than they did twenty years ago (Soubbotina, 2004:84). It has been argued that trade helps growth and that the poor tend to share in equal proportions with the rich in any rise in subsequent incomes. It has also been argued on the contrary, that inequality rises initially with growth, before declining once again. The evidence suggests modest widening in inequality in growing economies (Wolf, 2004:167,168). According to Leiva, three decades of neoliberal labour policies in Latin America have failed to deliver the promised results.
Neoliberals sees the opening of the economy to international competition, deregulated labour markets and “labour flexibility” as a recipe for eliminating unemployment, poverty and inequality. This is seen differently in Latin America. The expansion of capital enabled by labour market flexibility is seen as the cause, not the solution to rising poverty, inequality and unemployment in the Latin American region (Leiva, 2006). Latin America is a continent with relatively high wages and a history of protection aimed at distributing income from the agricultural sector to the industrial working class.
One would in these cases expect liberalization to create greater inequality (Wolf, 2004:168). Looking at Brazil in relation to capitalism it is clear that with so many poor people and a high level of inequality, capitalism will not benefit the people that are considered poor. The people that are not able to receive an education still rely on the welfare state. In the developing countries it take longer for the poor people to see how they can benefit from capitalism and globalization. 16
Globalization is reshaping how we have traditionally gone about studying the social world and human culture. It is evident that a field of globalization studies now is emerging across the disciplines. The globalization studies arose around sets of phenomena that drew researchers attention from the 1970s onwards. One of them was the emergence of a globalized economy that involved new systems of production, finance and consumption and worldwide economic integration. A second one was new transnational or global cultural patterns, practices and flows, as well as the idea of “global cultures”.
The third was global political processes, the rise of new transnational institutions and the spread of global governance and authority structures. A fourth one was the multidirectional movement of people around the world that involved new patterns of transnational migration, identities and communities. Finally, there is the phenomenon of new social hierarchies, forms of inequality and relations of domination around the world and in the global system as a whole (Robinson, 2007). The scholarly literature on the phenomena has spread, as have specific studies on the impact of globalization.
The increasing literature on globalization reflects the enormity of the task of researching and theorizing the breadth, depth and pace of changes underway in human society in the early twenty-first century (Robinson, 2007). Since this paper is an analysis of how globalization has affected the economic, political and social conditions in Brazil, it is appropriate to review the perspectives and effects of globalization. According to McGrew there are four modes of analyzing globalization. These are defensive globalism, critical globalism, post-globalism and glocalism.
In the view of defensive globalism, globalization is an existing and enduring condition that is changing societies around the world. The view can be divided into liberal and transformationalist perspectives. Globalization is generally seen, in the liberal view, as a benign process that has continuities with the past and historical changes. It is primarily economic in nature and leads to increasing integration through the market and technology. Liberal theorists Martin Wolf and Jagdish Bhagwati emphasize how globalization is re-structuring the world economy.
As trade has become more open and there is now a transnationalization of production, this creates a new world division of labour. This facilitates the rise of new economic powers such as China, India and Brazil. The liberals show awareness to the fact that there are problems associated with globalization, and they adopt the view that it can be made to function better (McGrew, 2007). 17 The transformationalist position is that globalization is unique in history and that it involves much more than economic changes. There are benefits to globalization, but there are also problems such as great inequality in and across societies (McGrew, 2007).
Castells argues that economic globalization is associated with a divided world, as the gap between the rich and poor widens, whilst much of humanity remains on the margins or is excluded from its benefits (Castells, 2000). Critical globalism takes on a critical view of globalization because it is associated with the extension and transnationalization of power. Theorists say that a new globalized social formation is in the making, which, according to critical globalist theory, requires new ways of thinking about and acting in the world.
Post-globalism says that globalization never occurred or that it is in decline or disappearing. Due to the fact that borders of nation-states are being reasserted, as is the case with the border of United States and Mexico, and nationalism is being revived, this can be seen as involving deglobalization. This view is under the impression that the whole idea of globalization has been “oversold” as a description of social reality, an explanation of social change and as and ideology of social progress. Glocalism is the final mode of analysis.
Holton argues that there is an interpenetration between the local and the global that has to be observed. He says that the global and the national or local may under certain circumstances depend on each other (Holton, 2005). According to Brenner, global and local cannot simply be dissolved into one another due to the fact that they retain their distinctive forms (Brenner, 2004). Hence, the explanation of one needs an account of the other (McGrew, 2007). It is obvious from these modes of analysis that different theorists have different views on the impact of globalization and what its implications are.
There are many different ways to measure globalization and the effects of it. A proxy often used for globalization is trade openness, which can be measured as total trade of GDP, FDI and portfolio investments. However, trade openness can be influenced by location of a country and access to the sea, which is important to take into consideration. Many efforts have been made to measure and quantify globalization, but the most common ways of measuring it is to split globalization into economic, political and social dimensions.
According to the KOF Index, developed by Axel Dreher, these three measures are used. The advantage of using Dreher’s three dimensions for globalization is that it is the most 18 comprehensive measure, not only taking the trade openness into consideration but also the political and social structure. By looking at Axel Dreher’s index of globalization, we have decided to use the following as a measurement for globalization and the effects of it (see appendix 1).
Economic globalization: This dimension consists of two dimensions, actual capital inflows that measure the extent to which a country is exposed to foreign capital and trade with the world including income payments to foreign nationals. The second part of the economic globalization consists of restrictions of capital and trade flows, which work as obstacles to market access. Political globalization: Measures the degree of a country’s political integration. For example it measures diplomatic relations with the rest of the world and international relations.
Social globalization: Indicators on social globalization can be for example poverty, unemployment and income distribution. Taking Dreher’s globalization index into consideration, we have decided to look at how the economic dimension of globalization has affected the political and social dimension. As proxy for economic globalization, we will look at FDI-inflows in Brazil from 1990 until today. After this, a review of the political landscape in Brazil will be made, telling us a little bit about what happened in Brazil during these years.
Furthermore, as proxies for social globalization we will use poverty rates and income distribution, as these two measurements can say a lot about how the people’s welfare in Brazil has developed during the recent era of globalization.
The economic dimension of globalization
FDI remains a key element in the rapidly developing globalization process and it provides means for creating direct, stable and long-lasting links between economies. FDI can also serve as an important vehicle for local enterprise development, and it may also help improve the competitive position in the receiving economy.
FDI encourages the transfer of technology and know-how between countries, and it provides an opportunity for the host economy to promote its products more widely in international markets. Additionally, FDI has a positive 19 effect on the development of international trade (OECD Handbook on Economic Globalization Indicators, 2005). FDI plays an important and growing role in international business since it can provide a firm with new markets and marketing channels, access to new technology, products, skills and financing, as well as cheaper production facilities.
For a host country or foreign firm that receives the investment, it can provide a source of new technologies, processes, capital products and management skills, which in turn can provide a strong impetus to economic development (Graham and Spaulding, 2004). The United Nations Conference on Trade and Development (UNCTAD) has defined FDI as “an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor”. In cases of FDI, the investor’s purpose is to gain an effective voice in the management of the enterprise.
The foreign entity or group of associated entities that makes the investment is termed the “direct investor”. Another important term is “direct investment enterprise”, which refers to the unincorporated or incorporated enterprise-a branch or subsidiary, respectively, in which direct investment is made. Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of the enterprise. The Balance of Payments Manual, which has been developed by the IMF, suggests a threshold of 10 percent of equity to ownership to qualify an investor as a foreign direct investor.
This is the level of participation at or above which the direct investor is normally considered as having an effective say in the management of the enterprise involved. However, countries differ in the threshold value for foreign equity ownership, which is seen as evidence of a direct investment relationship. As mentioned it is suggested to be at 10 percent for FDI, for data on the operation of Transnational Corporations (TNC) it involves chosen ranges of between 10 and 50 percent. Countries that do not specify a threshold point rely entirely on other evidence.
This included the companies’ own assessments as to whether the investing company has an effective voice in the foreign firm in which it has an equity stake. The quantitative impact of differences in the threshold value used is relatively small, owing to the large proportion of FDI, which is directed to the majority-owned foreign affiliates. It is necessary to define which capital flows between the enterprise and entities in other economies should be classified as FDI, once a direct investment enterprise has been identified.
Only capital that is provided by the direct investor either directly or through other enterprises related to the investor should be classified as FDI, since the main feature of FDI is 20 taken to be the lasting interest of a director investor in an enterprise. Equity capital, the provision of long-term and short-term intra-company loans (between parent and affiliate enterprises) and the reinvestment of earnings are the forms of investment by the direct investor, which are classified as FDI.
To get a deeper understanding for FDI one need to understand the difference between FDI and other types of investments. Direct investors have different investments motives than investors in portfolio investments. Investors that invest in FDI intend to have a long-term relationship with the foreign company to enable them to have a significant influence on their management. Portfolio investors or other investors may also have a long-term outlook, but they have no intention of establishing a long-term relationship with the management of the foreign company in question.
Portfolio investors either invest a relatively small amount in the voting shares of the foreign company or acquire other types of claims in the foreign company (UNCTAD, 2009). In the past decade, FDI has come to play a major role in the internationalization of business. New information technology systems and decline in global communication costs have made management of foreign investments far easier than in the past. Proponents of foreign investment emphasize that the exchange of investment flows benefits both the home and host country (Graham and Spaulding, 2004). .
The political dimension of globalization
The political dimension of globalization is all about the political forces that shape the waves of globalization in a country. Political decisions such as openness to trade, income distribution and membership in international organizations are all things that might affect the way globalization hits a country and its people. According to Acemoglu and Yared, openness to globalization is the same as openness to trade, and how open a country chooses to be to foreign investments is mainly a decision that the government takes.
This means that changes in the political atmosphere can change the whole process of globalization for a country. They also state that countries that are experiencing greater militarization and those countries witnessing greater militarization among their trading partners have seen smaller increases in trade over the past 20 years. This means that political changes and a strong military could be a reason for a smaller increase and exposure to the globalization.
Political integration is a dimension of the globalization process that binds states together through bilateral contact and as members of international organizations. A higher participation from one country in global 21 politics, closer the political ties between governments and lead to greater cooperation. The political integration within a country is definitely a reason for the welfare of the people of the state (Acemoglu and Yared, 2010). The political dimension of globalization has been discussed in the globalization literature ever since globalization was “discovered”.
The emphasis has been on the decline of the nationstate under the impact of global forces. When globalization increases, boundaries are becoming smaller and borders are erased. For some, the process of globalization has opened up new possibilities while globalization for others has lead to a loss of independence. One of the most common forms of political globalization is the worldwide spread of democracy. Democratic government exists in some form in most parts of the world and where it does not, as for example in China, there is a considerable demand for it by democratic movements.
Since the collapse of the Soviet Union and the end of the communist regimes in Europe after 1991, democracy has become the universally acceptable form of government (Delanty and Rumford, 2007). Taking Dreher’s measurements of globalization into consideration, political globalization can be measured as a degree of a country’s political integration. To analyze the impact of it, one can analyze the political forces that have affected the growth in the country in question. Political globalization can also be measured by diplomatic relations with the rest of the world and international relations.
Hence, a good way of assessing this way of globalization would be to look at a country’s integration with the rest of the world as for example membership in international organizations, but also to look at what forces that has been behind a country’s decision to open up its markets to trade (Dreher, 2006). According to the WTO Trade Policy Review, globalization is making all nations increasingly independent, which means that the world needs better global rules, policies and institutions that ensure that globalization does not lead to larger inequalities around the world.
People experience both opportunities and problems with an increasingly interconnected world, and the importance of politics and stable institutions is increasing. Policies within nations continue to be a key factor in determining whether or not countries and people benefit from globalization. According to the report, globalization leads to economic adjustment in all countries, both industrialized and developing. New economic opportunities emerge, but they may demand new skills and may also appear in new locations.
Relocation of production between countries can destroy jobs in one place and create employment in others. Whole regions where production is concentrated in declining sectors suffer, while other sectors 22 benefit from new opportunities. The whole role of the political dimension of globalization is that governments need to manage these changes in coordination with key actors to support adjustment and new opportunities and to protect citizens from insecurity. The challenges are especially important in many of the developing countries, where unstable institutions and infrastructure are key problems.
The basis for good governance is a well-functioning democratic political system that ensures representative and honest governments that are responsive to the needs of the people, which means more than just holding of regular and free elections. It also involves respect for the human rights of the people, and involves basic civil rights such as freedom of expression. Financial liberalization exposes countries to greater risks of economic fluctuations, and can be especially devastating when a financial crisis occurs.
This risk requires a strengthening of the role of the government in providing social protection for the people. At the same time as globalization create new jobs it can also relocate jobs, which mean that some people get new jobs while other people lose theirs. This effect on employment emphasizes the need for stronger people that can only contribute and benefit from globalization if they are endowed with knowledge skills and values and with the capabilities and rights needed to pursue their basic needs. They need employment and incomes, and a healthy environment.
These are the essential conditions that empower them to lead a self-determined, decent life, and to participate fully as citizens in their local, national and global communities. These goals, which are at the heart of the Millennium Declaration1, can only be reached if national governments ensure a good education, basic infrastructure and the environment needed to create the institutional framework for it (World Commission on the Social Dimension of Globalization, 2004).
The social dimensions of globalization
One can say that there are people that benefit from globalization while others do not. Globalization has by critics been called a global apartheid, with increasing inequalities and huge contrasts between those who benefit from it and those who do not. As an example of this, one can take Bill Gates, who earned 120 million USD per day in 1999 while 1. 3 billion people still live on less than one USD per day. Another example is the industrial countries, 1 The Millennium Declaration was adopted in 2000 by all 189 member states of the UN General Assembly.
The Declaration sets out within a single framework the key challenges facing humanity at the threshold of the new millennium, outlines a response to these challenges, and establishes concrete measures for judging performance through a set of inter-related commitments, goals and targets on development, governance, peace, security and human rights. (http://www. undg. org/index. cfm? P=70) 23 which have 88 percent of all Internet users while 2 billion people do not even have access to electricity.
At the same time, it is important to remember that globalization provides opportunities for human development (The Social Dimensions of Globalization, 2000). The social dimension of globalization refers to the impact globalization has on the life of the people in the country. Concerns are often raised about the impact globalization has on employment, working conditions, income and social protection. The social dimension of globalization also includes security, culture and identity. These will however, not be assessed as measurements in this paper (International Labour Organization).
There are no doubts that globalization brings potential for development and wealth creation. But there are many different views and perceptions among people as people are concerned about its economic and social impact. Some argue that the present model of globalization has created problems such as unemployment, inequality and poverty, while others argue that globalization helps to reduce these issues. These problems predated globalization of course, but it is clear that for globalization to be politically and economically sustainable, it must contribute to their reduction.
Hence, the goal of globalization is what meets the needs of all people (International Labour Organization). While some people benefits from the waves of globalization, others suffer from it. Concerns about increasing income inequalities in the world have become more and more widespread over the past 20 years. Rising income inequality does not generate concern only in the high-income countries, but also in emerging markets where fast growth has led to concerns about growing income differences.
To be able to make an analysis of income distribution, inequalities and poverty, it is necessary to distinguish between these terms since they are often confused. According to Duncan, there is no doubt that between the richest and the poorest countries the gap in average incomes has been growing for the last decades. But, one must also consider that many of the poorest countries some decades ago, does not count as one of the poorest countries today. It is also important, according to him, that global welfare should be measured in terms of people, not countries.
China and India together, for example, account for close to half of the world’s population. Both countries have been increasing the per capita GDP very quickly in recent years, much faster than the high-income countries. Within developing countries, research has not been able to find any systematic relationship between economic growth and changes in income inequality. Within globalization and inequality, it is interesting to look at what role globalization played in 24 changes in income inequality. Most research on this issue has been concentrated in recent years on the changes in income inequality in the high-income countries.
The focus has been on whether the widening wage gap in the US or the increasing unemployment in the EU is due to increased imports of labour-intensive goods from developing countries (Duncan, 2000). Poverty, on the other hand, as a public concern is now widely considered to be a multidimensional problem, whether it is at the global, national or community level. According to Lister, “how we define poverty is critical to political, policy and academic debates about the concept” (Lister, 2004:12). Three alternative conceptions of poverty have evolved as a basis for international and comparative work since the 1880s.
The ideas of subsistence, basic needs and relative deprivation is what they principally depend on. These ideas have influenced scientific practice as well as international and national policies for over 100 years (Chambers, 2006). The organization distinguishes between “absolute” and “overall” poverty. Absolute poverty has been defined as “a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health shelter, education and information.
It depends not only on income but also on access to services. ” Overall poverty is defined as “lack of income and productive resources to ensure sustainable livelihoods; hunger and malnutrition; ill health; limited or lack of access to education and other basic services; increased morbidity and mortality from illness; homelessness and inadequate housing; unsafe environments and social discrimination and exclusion. It is also characterized by lack of participation in decision-making and in civil social and cultural life. Overall poverty occurs in all countries, and can be recognized as for example loss of lives as a result of economic recession, sudden poverty as a result of a war, poverty of lowwage workers and humans that fall outside of family support systems, social institutions and safety nets (Gordon, 2005). The UN agreed upon this definition in 1995, however, in 1998, the organization introduced a new definition that does not distinguish the different levels of poverty. The UN now has the following definition of poverty “Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity.
It means lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow ones food or a job to earn ones living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, 25 and it often implies living on marginal or fragile environments, without access to clean water or sanitation” (Gordon, 2005).
As mentioned above, poverty can be divided into absolute and relative poverty. But, it can also be divided into new and old poverty. Old poverty is when people have a lack of food and basic services as medicine and education. New poverty is drug addiction, violence at home, family break down and environmental degradation. According to The Economist, the problems of new poverty are more complex than the problems of old poverty because they often occur in big, fast growing cities particularly in developing countries (The Economist).
Poverty is a phenomenon that has to be understood as a painful reality experienced by millions of human beings and as a construction of competing conceptualizations, definitions and measures (Lister, 2004:36). What we see from the definitions is that people are in poverty when they are deprived of income and other resources needed to obtain the conditions of life that enable them to play the roles and participate in the relationships and customs of their society (Townsend, 2006).
Income inequality is usually measured by the Gini coefficient; one of the most commonly used proxies of economic inequality. For a completely equal income distribution in which the whole population has the same income, the Gini coefficient will be 0, while a value of 1 indicates that all incomes in a country are concentrated to one single person (The World Bank).
Social development in Brazil
According to Maluf and Burlundy, Brazil can be classified as a “large middle income country”.
The condition of being a “large country” is an important differentiating factor with implications in terms of socioeconomic patterns, international relations and institutional capacities. A country is usually considered large when it possesses a high population; from the economic viewpoint this factor is expressed in the size of the domestic market, which increases the possibility of diversification in the productive base. In addition to population, a second variable to consider is the country’s geographic scale, a feature that is receiving 26 ncreasing attention not only because of issues related to spatial distribution of people and infrastructure, but also the implications in terms of the availability of natural resources, regional diversity and the need for decentralized strategies, among other questions. Here, the classification “middle income” differentiates economically those countries grouped under the euphemism of “developing countries”, where the income level clearly shows an intermediary condition between the developed countries and the other nations making up the periphery of the global economic system.
It may be presumed that large middle- income countries possess a distinct institutional capacity across the various areas of public action (Maluf and Burlundy, 2007). Generally, the evolution of poverty, especially in Latin America, depends on three elements: the level of inequality, the variation in this level and the economy’s rate of growth. Even if the country displays a more pronounced economic dynamism, which is measured by the GDP growth rate, the conversion of the latter into greater social equity depends on the existing level of inequality and the adoption of measures to reduce it.
In Brazil, the persistence of absolute poverty is largely the result of the well-known inequality in the distribution of income. Poverty levels are more sensitive to alterations in levels of inequality than the variations in economic growth (Maluf and Burlundy, 2007). A term that describes the social conditions in Brazil in quite a way is inequality. When looking at the social development of the country it is important to understand why Brazil has become such an unequal society even though it is such a large economy.
To understand the current gap between the rich and poor in Brazil, one has to look at the socio-historical factors. According to a report by the World Bank written in the late 80s, Brazil has one of the most unequal distributions of national income in the world. Glaring disparities in the living standards, health status and educational attainment of different segments of its population have persisted despite several decades of remarkable economic growth (Bruns and McGreevey, 1988). This has not changed.
According to Beghin, Brazil is still one of the most unequal nations in the world, although it is one of the wealthiest (Beghin, 2008). It has high levels of social spending compared to other developing countries, measured as a share of GNP and of total public spending (Hunter and Sugiyama, 2009). This year, Brazil was ranked as the eighth largest economy in the world, surpassing Italy (DR, 2011). Despite the size of the economy, the income distribution is unequal to such an extent that it can be compared to some of the poorest African countries such as Sierra Leone, Lesotho and Namibia (Beghin, 27 008). In Brazil, the richest one percent of the population – less than 2 million people – have 13 percent of all household income. This percentage is similar to that of the poorest 50 percent, about 80 million Brazilians. This inequality results in poverty levels that are inconsistent with an economy the size of that of Brazil. Also, 30,3 percent of the population, 54 million people, are considered poor, and within this group, 20 million people, 11,5 percent of the population, are ranked as extremely poor (Beghin, 2008).
Brazils high incidence of poverty, low educational achievement, and middling health indicators explain why it ranked 73th globally in overall human development in 2010 (UNDP, 2010).
A historical perspective
The main reason why so many Brazilian families are living in poverty is not a general lack of resources, but rather their distribution. Inequalities and poverty in contemporary democracies result from tensions between the ethical requirements related to “rights” and the imperative of economic efficacy; between the legal order that promises equality and the reality of exclusion brought about by the exercise of power.
Back in time, in many western countries, there came a time when social disparities were so extreme that society mobilized g