FINANCIAL CRISIS

Economic Competitiveness Advantage during the Financial Crisis in UK and Brazil

Abstract3

Chapter 14

Introduction4

Causes of the Crisis8

Familiar Factors8

Rising Asset Prices8

The Credit Boom8

Marginal Loans and Systemic Risk9

Regulation and Supervision9

Less Familiar Factors10

Households10

The Increased Interconnectedness of Financial Markets10

Opaque and Complex Financial Instruments11

High Leverage of Financial Institutions12

Chapter 214

Literature Review14

Theories of Development14

Financial Crisis36

Brazil: The Latin American Economic Tiger36

Financial Crisis in UK40

Chapter 347

Methodology47

Chapter 449

Presentation of Data49

Chapter 551

Findings51

Chapter 653

Discussion53

Agriculture53

Production54

Export54

Livestock55

Mining and semi-processing55

A world-ranking producer of metallic minerals56

Manufacturing58

Chapter 760

Conclusion60

References65

Abstract

The paper analyses the economic competitiveness advantage during the financial crisis between Brazil and UK. This paper examines the impact of globalized financial markets on domestic economic policymaking and, ultimately, on economic sovereignty. A natural outcome of the globalization of Brazil's financial markets has been the increased vulnerability of the Brazilian economy to contagion from financial crises in other troubled markets of the globe. This paper focuses on how the contagion channel compromised domestic economic policymaking and affected the real sector of the Brazilian economy. It offers the first analytical attempt at estimating the real cost of contagion by investigating the impact of the UK crises on Brazil's output and production.

Chapter 1

Introduction

The global nature of the current crisis has made it clear that while financially integrated markets have benefits, they also have risks—with significant consequences for the real economy.

Globally, there is a need for reform in the financial sector. For advanced countries, this crisis has had a severe impact on the real economy as well as the financial sector, and has led to extensive government intervention—all of which will shape the future financial landscape and actions. Emerging markets and developing countries face some of the same reality—despite many being innocent bystanders—and must also coping with the added burden of significant short- and medium-term challenges, including in developing their financial systems. This crisis is still evolving and policy must ensure that regulation and markets continue to operate as complements. In emerging markets and developing countries, policy-makers must also consider the compatibility of proposed reforms with development targets and their level of institutional development.

The current international financial system is characterized by an increasingly liberalized environment where finance capital is free to roam the world in search of the highest return. Policy reforms around the world tend in that direction, with a focus on price stability, central bank independence, the privatization of state-owned enterprises, the abrogation of trade and capital controls, and so forth. As a result, flows of financial capital from “developed” countries toward “emerging markets” have surged, taking the form of portfolio investments in liquid assets or the acquisition of local productive assets and financial institutions by multinational corporations. Within “developing” countries, significant changes took place in the balance of power between labor and capital, in favor of the latter, giving rise to increasing unemployment, decreasing real wages, and decreasing unionization and labor activity (Duménil and Lévy 2003; Harvey 2003).

Although the capitalist system was thus evolving, there was a concomitant increase in the frequency of financial crises (Eichengreen 2002). This raises questions regarding the effects these crises could have on ...