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Brazil: The Country of the Future, Again?

Growth is down in Latin America’s largest economy and nervous, shell shocked Brazilians are crossing their fingers that their economy isn’t still stuck in its historic trap of commodity-dependence and high inflation.

Brazil, which grew 2.7 percent last year, isn’t the only emerging economy to slow down in the wake of decelerating growth across the developed economies: China lowered its growth target to its lowest in a decade, and India’s GDP is also quickly slipping. But Brazil’s long history of booms and busts, of bursts of economic dynamism which never quite manage to catapult the country to the front ranks, makes this slowdown more worrisome.

Brazilians are largely blaming the meltdown on Europe. Guido Mantega, the country’s finance minister, said, “if the global crisis hadn’t worsened in the second quarter, our growth [for 2011] would have been closer to 4 per cent.” Europe’s recession has hammered Brazil’s export sector and diminished the investment flowing into the country, while policy-makers in the US and in Europe have followed radical monetary policies that have the effect of weakening the dollar and the euro against the currency of commodity exporting countries like Brazil. The high value of the Brazilian real makes Brazilian manufactured goods less competitive in export markets — and also at home.

The past still haunts Brazil. The country suffered countless booms and busts through the 19th and 20th centuries and was the poster child of hyperinflation in the 1980s and 1990s. The country finally began to sustain growth after the Plano Real was introduced in the mid-’90s, and the future finally seemed set to arrive after the financial crisis, when Brazil recovered at lightning speed.

Brazilians worry about a return to their days of weak or negative growth. President Dilma Rousseff has long advocated lowering the country’s interest rate to stimulate lending and infrastructure development. But there is fear that lowering interest rates too fast without cuts to government spending will cause a blowup in inflation. In the middle to long term, only unpopular structural reforms can keep inflation at bay.

Brazil’s greatest fear is to be trapped between two choices: for slow growth or high inflation.  This is what worries Dilma, as everyone in Brazil calls President Roussef; unfortunately, the only way to avoid the trap may be to make exactly the kind of policy choices (spending cuts, labor market deregulation, privatization) that Dilma’s electoral base doesn’t like.

Much depends on what Dilma does next. Via Meadia will be watching.

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  • Kris

    “Via Meadia will be watching.”

    I’m getting the feeling that this “Via” gal is quite the voyeur.

  • EF

    It seems Via Meadia’s coverage of Latin American economics has gotten much more robust in the past few weeks. Keep it up! Enjoying the analysis!

  • Marco Brandao

    I totally agree when you say that Dilma has to do some very unpopular structural reforms to speed up the growth rates. Its well know that those reforms aren’t welcome to her electoral base.
    However when he says that the governament its lowering the interest rates to stimulate lending and infrastructure development without caring about the risk of inflation its a big LIE.
    The interest rate is being lowered because the inflation is declining and the government cutted R$ 55 billion of its budget this year adopting an austerity posture. The financial marked, the IMF and the all of the risk agencies are NOT predicting any risk of inflation for this year or the next years ahead.
    The true is american economists never “believed or will believe” of the success of Brazilian economy. They do not understand our economy or our culture. When the Real Plan (The monetary plan which over the high inflation and brought the dream of monetary stabilization to Brazil), was lauched in 1994, the american government and the IMF do not believe in the success of the plain arguing that “it was fated to fail as all the others plans”. Nevertheless it was a success consequently the first step given by the government towards to the stabilization. This is a great exemple explaining what I’ve said ahead.

  • Frederico Ferreira

    The poorly kept secret is that there are no political parties in Brazil willing to talk about the necessary changes enumerated there: spending cuts, labor market deregulation and privatization are as close to a third rail that you have in Brazilian politics.

  • livermoron

    Too many monkeys in Brazil.
    Just ask the Simpsons.

  • theyenuy

    Yes, Via Meadia’s coverage has been more robust of late; may it continue to be ever more so.

    Competitive currency devaluation, that commenced this month, picked up steam, causing debt deflation in sovereign debt, BWX, worldwide.

    Today the Brazilian Real, BZF, traded lower on fears of diminished growth; and in response Brazil Small Caps, BRF, and EWZS, traded lower.

    The world major currencies, DBV, seen falling since March 2, 2012, in this ongoing chart, and the emerging market currencies, CEW, have caused debt deflation, that is currency deflation most strongly in the small cap stocks, with KROO, EWO, SCIF, ARGT, ERUS, loosing the most in value since the market top on competitive currency devaluation, as confidence wains in the world central banks’ monetary policies. World stocks, VT, and World Small Stocks, VSS, are now trading lower, on the failure of fiat money. The fiat money system is dying; the diktat money system is rising in its place.

    The rise in the US Dollar, $USD, UUP, this month communicates that the Banker Regime of Neoliberalism, that came via Milton Friedman’s Free To Choose Script, which has underwritten capitalism, is dead.

    The Beast Regime of Neoauthoritarianism that comes via fate, is rising out of the profligate Mediterranean nation of Greece. Fate, working through the creative destruction of capitalism, is underwriting regional global goverance in the Euro zone. Soon the Beast Regime will manifest in all of mankind’s seven institutions, and in the world’s ten regions, each with its own unique form of regionalization. Regional blocs have already formed these; CELAC and the Shanghai Cooperative Organization for example. The seigniorage, that is the moneyness of fiat financial instruments and credit, is waining. The seigniorage of diktat will emerge, with its own unique form in every country and region.

  • gringojay

    Seems the “hot money” foreign investors had pushed into Brazil during the last ruler has significantly moved elsewhere. Now domestic lowering of interest rates dragged out to shake peoples’ money into circulation. Current president ill prepared to juggle dilema & her electors won’t be forced to bear bitter monetary cuts.
    Inflationary cycle very likely. 20+ years ago worked in Rio & supermarkets didn’t bother marking prices
    on merchandise because price constantly needed to be marked upward. That was even after the old “Cruzero” banknotes were withdrawn and printed
    anew as “Novocruzero” bills that had dispensed with about 3 (or more) zeros after the number on
    the old paper money.

  • PacRim Jim

    Don’t leave out Brazil’s greatest asset: Bossa Nova, particularly that of Dom Jobim.

  • Rich K

    Is it Crackpot day at Via Media Walter?
    Oh, wait,those folks ahead of me are simply too elevated in intellectual capacity to make these macro concepts understandable to pleebs like me.Time to go wax my Unicorns Horn.

  • FX Meaney

    Investors are no doubt nervous about the stepped up meddling in the private ecoonomy by the current president, even more of cialist than Lula. Forcing what appear to be political leadership changes in the largest publicly traded company and disadvantaging foreign owned companies does not build confidence.

  • Esteban

    The Brazilians live high when commodity prices are high. When they make a lot of money selling their natural resources, which are abundant, they increase social services and get the people addicted to the money. When prices drop, there is a lot less money yet people remain addicted. This is what one might call eating the seed corn.

  • Kris

    Esteban@11: Oh, those crazy Brazilians! How fortunate the equivalent could never happen in the good old United States of America…

    livermoron@5: “Too many monkeys in Brazil.”

    One can never have too many monkeys! At worst, they just make skeet shooting more affordable.

  • Nicholas

    @livermoron: “Too many monkeys in Brazil.”

    Monkeys are better than too many morons in the USA. Just look at the mindset and behavior of the people who watch the simpsons.

    @Marco Brandao says: Correct. Majority of the people from the US do not and cannot understand Brazil’s culture(s), Brazil has many and its economy. Why? With no shame they are To lazy to study it and have the idea that if something doesn’t work in the US and cannot and will not work outside. We have witnessed how wrong they are and we witnessing now who is in decline and who have many opportunities to rise slow or fast. Brazil is not perfect and never will be perfect, but so long it does what it must do and don’t follow the idiotic neoliberal economies from the so called west (who are broke), Brazil will do fine and go up and down as what happens to all economies.

  • Deivyd

    @Marco Brandao, I’m a Brazilian living abroad in the U.S. for many years now. I’ve seen first hand why Americans think that nothing in South America could work. They are brained washed that the world could not function without them. Unfortunately these thoughts are always shared by any empire at it’s peak. If you look at the Romans, Aztecs or Persian empires at their peak they all thought that they could do no wrong and that everyone else around them couldn’t succeed the way they did. Not all Americans share this view but after being brain washed by the media for years, what do you expect. I’ve been able to watch Brazil’s growth from an outside view and it really has grown vastly over the years, which makes me very proud. Brazil reminds me of a little kid growing up and all the grown ups (U.S., China, Europe) telling him what he should and should not do. It’s great to take advice but in the end you have to live your own life the way you feel fits you best. I just wish more Brazilians shared your faith in Brazil’s presence as a world power instead of buying into all the [stuff] that puts Brazil down.
    @livermoron, you are a moron.
    @Nicholas , very well put. Again I think that any empire thinks that if it doesn’t work for them, then it won’t work for anyone else. It’s almost like, If I can’t beat this game then no one can. There are many factors, which are contributing to the U.S.’s decline, but laziness and stubbornness are huge ones.

  • Juan

    In the last week alone, Obama gave two more examples of how clueless Americans have become in their dealings with Latin Americans. First, Dilma Rousseff came to Washington, only to be almost ignored by Obama. As a commentator for the Guardian (UK) put it, he was too busy rolling Easer eggs in the White House’s lawn.
    Then, he travels to Colombia for the Summit of Americas, delivers a lame statement about a “new era of partnership”, which just shows how much he disrespected his regional peers: this was pretty much a rehashing of his speech “to the people of Latin America”, when the sound bite was about the US and Latin American nations being “equal partners”.
    To add to the mix of cluelessness and disrespect, facing the growing sentiment that the war on drugs is a failure that brought death and deep corruption of the political systems and that alternatives to this strategy must be considered, his only response was to state that legalization is out of question. This would be fine if he had only bothered to put forward any alternatives. But no, all he could manage to do was pay some lip service to the obvious fact that the US is part of the problem as the largest consumer market for drugs (duh).
    While a lot of rhetorical energy is spent blasting the more confrontational governments of Cuba, Venezuela, Bolivia and Equador, few people in Washington seem to be paying attention to the fact that even conservative, pro-US governments such as those of Colombia, Chile or Guatemala are becoming more and more interested in building regional institutions than in trying to be heard by the US.

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