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News From the Country of the Future

Brazil’s effort to escape 200 years of underachievement continues to run into trouble. Various international banks cut this and next year’s growth forecasts to as low as 3.1 percent, from a high prediction of 4.5 percent. The FT explains:

Brazil’s government has continuously warned that the country is not ‘immune’ to events abroad but the latest bout of pessimism shows just how vulnerable Brazil is. Despite all the optimism about consumer demand and rising middle classes, Brazilian growth is still very much indexed to global commodity prices.

About 47 percent of Brazil’s economy is based on “basic products”.  In past decades Brazil’s manufacturers were protected from foreign competition by high tariffs; the result was an uncompetitive industrial morass dominated by rent seeking companies with strong links to political and military leaders.  Opening up the Brazilian economy has reduced prices, but Brazil has struggled to build a manufacturing sector that can compete with countries like China.

High prices for Brazilian commodities perversely make it harder for the country to diversify by keeping the currency so high that Brazilian manufactured products are priced out of many markets.  The strong currency has also contributed to a consumption boom and a credit bubble.   Partly as a result the economy rests dangerously on commodities like soybeans and iron ore, and Brazil depends on countries like China to buy its natural wealth. So much so, in fact, that “if China’s economy…encountered a hiccup, let alone stalled, Brazil’s party would be over pretty quick.”

Economic doldrums are not as bad in Brazil as they are in northern hemisphere but news that Brazil’s manufacturing sector has slipped in recent months will only make the dependence on commodities stronger.  International market turbulence combined with political stagnation and corruption at home has blown Brazil off course before; President Dilma Rousseff will struggle to prevent history from repeating itself.

Wish her well.

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