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Make or Break Time for Brazil?

As Americans who were alive during the Carter administration know all too well, stagflation—low growth mixed with inflation—is something you don’t want. Unfortunately, Brazil could be headed in that direction, according to the FT. Last year, inflation there reached 5.84 percent, well above the central bank’s target of 4.5 percent. That figure, combined with disappointing economic growth of only 1 percent last year, has many people worried that stagflation is just over the horizon:

“This tolerance about inflation means industrial costs and other costs are going up and the country is [becoming] increasingly uncompetitive,” said Alberto Ramos, an economist at Goldman Sachs.

After a long period of optimism, sentiment on Brazil seems to be souring among investors and businessmen. Some worry that the government has forgotten the lessons of hyperinflation in the past, and that economic micromanagement by the government is threatening the country’s basic health.

Not all the news is bad, however. The country’s inflation rate, though high, is lower than it was the year before, and the government is hoping for faster growth this year.  But seasoned Brazil watchers worry that old bad habits are gaining ground — that vested interests are taking advantage of the government’s interventionist instincts to press policies that inexorably reduce the economy’s dynamism overall.

Brazil has had many promising growth episodes in the past, but has so far been unable to sustain the long term, multi-sectoral growth that could catapult the country into the front rank globally. The wild swings of global commodity prices combined with the power of special interests in Brazilian policy making have been putting obstacles in Brazil’s path for generations. It is not yet clear that Brazil has put this past behind it; the next two or three years could be make or break.


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