Effects of economy-wide factors on Brazilian economic growth and biofuels production: an inter-temporal general equilibrium analysis.

Abstract

Disenchantment with the Washington Consensus has led to an emphasis on growth diagnostics. In the case of Brazil, the literature suggests three main factors impeding growth: low domestic savings, a shortage of skilled workers, and a lack of investment in the country's transportation infrastructure. The unique contribution of this study is to show the inter-temporal implications of relaxing these constraints. We fit a multi-sector Ramsey model to Brazilian data, validate its fit to times data, and provide empirical insights into the economy's structural transformation to long-run equilibrium. Then, the sensitivity of these results to relaxing each of these three constraints is investigated in a manner that yields the same long-run level of wellbeing. Analytical concepts adapted from static trade theory are used to provide a detailed explanation of how the economy responds in transition growth to the relaxation of these impediments. Addressing these factors clearly benefits the economy, but they do not launch the economy to a substantially higher growth path. In order to enhance energy security and independence, Brazil has supported the production and use of ethanol. Brazil's leadership in this market reveals complex inter-linkages between ethanol, sugarcane, sugar and fossil fuels. These sectors have been growing an average of 14% per year, while the country's growth rates have been very modest. This paper presents a theoretical framework for understanding the interaction between Brazil's economic growth and the evolution of these sectors as the economy transitions toward long-run equilibrium. Then, the sensitivity of these results is analyzed under two simulations; first, a reduction of the cost of financial intermediation (which the literature identifies as one of the factors affecting Brazil's growth), and second, an increase in ethanol prices by 2.6%, based on the expectation that biofuels' world demand is increasing.