One of the less-discussed problems with blistering economic growth is “managing abundance.” As countries like China, India, Brazil, and Turkey post high growth rates year after year, the boom times can plant economic time bombs.In Brazil, fears have begun to mount over a “crisis” in liquidity, despite high interest rates. The culprit? Brazil’s own success: the frenetic pace of speculative and foreign direct investment in Brazil.
“Capital flows have significantly exacerbated domestic problems like bubbles and inflation that could potentially throw emerging economies off their growth paths and produce social instability,” says Cornell University economist Eswar Prasad, who formerly ran the China division at the International Monetary Fund.Brazil President Dilma Rousseff’s eight-month-old administration has fought a difficult battle to keep the real from rising. Brazilian officials blame near-zero interest rates in the U.S. and Europe for making it possible for hedge funds to borrow cheaply in the rich world to place bets in Brazil.“We have to defend ourselves from this immense, fantastic, extraordinary sea of liquidity that finds its way to our economies in search of returns that it can’t find in its own,” Ms. Rousseff told Latin American leaders on July 28 in Lima.
The worry is that the liquidity and credit boom leaves the Brazilian economy inordinately vulnerable to the whims foreign banks and creditors. If a European default happens — boom, suddenly FDI vanishes and growth along with it. If China’s export markets get hit harder — boom, and it suddenly has less demand for Brazilian foodstuffs, ore, and other natural resources.They don’t call economics the ‘dismal science’ for nothing; even growth has its drawbacks. Commodity booms and busts have thrown Brazil off course before; Via Meadia hopes that this time is different.