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Last updated: August 2, 2011 6:09 pm
Brazil enjoys success amid global insanityBy Joe Leahy in So
Paulo
Once no strangers to economic crisis themselves, Brazilians in
recent months have suddenly landedin the enviable position of being
spectators to the follies of the developed world.
Current affairs chat shows on Brazilian television have been
abuzz for weeks with discussion of theproblems sweeping Europe and
the US, from the Washington debt ceiling standoff to the
Greekfinancial crisis and the News of the World scandal in the
UK.
Dilma Rousseff, Brazils president, seemed to sum up Brazilian
perceptions of an outside world gone
crazy last week when she described the debt crises in the US and
Europe as insanity. The politicalincapacity of the developed world
to find solutions to its problems, she said, posed a threat to
theglobal economy.
A struggling emerging market a decade ago, Brazil is today a
picture of political and macro economic stability compared with its
once over bearing partner to the north and the former
colonialpowers of Europe.
Not only is Brazil now a creditor to the US, with $327bn in
foreign currency reserves as of June, the
countrys economy is growing steadily and unemployment is at
record lows.
Yet, with the developed world showing tendencies once associated
with emerging markets, thechallenge for Brazil is how to manage its
success. It cannot afford to be complacent in the face of thestill
daunting task of lifting itself out of the middle income trap in
which its economy has been stuckfor decades.
The breakthrough for Brazils economy came during the 1990s when
former president FernandoHenrique Cardoso launched a series of
policies aimed at stabilizing consumer prices and theexchange
rate.
His successor, former president Luiz Incio Lula da Silva,
continued this focus on macro economicstability while expanding
social programmes to improve the living standards of the very
poor.
The results were impressive. Economic growth in Brazil has
averaged 4 per cent a year over the pasteight years and nearly 49m
Brazilians have been lifted into the middle or upper classes.
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Brazil has also proven relatively responsible in handling recent
challenges. Its economic success hasattracted a flood of money from
stagnant developed markets, driving up the exchange rate of
Brazilscurrency, the real, against the dollar and threatening the
competitiveness of local industry.
Brazils has responded with the so called currency war a series
of capital and currency controlsaimed at curbing this appreciation.
But Brazil has mostly resisted pressure from domestic industry
to
take extreme measures, instead imposing a complex system of
taxes designed to discourage short term hot money flows.
On the fiscal front, Ms Rousseff has sought to rein in a
spending splurge during federal elections lastyear by reducing the
proposed size of this years budget.
The central bank has also taken the politically difficult
decision of increasing Brazils already highbenchmark rates five
times this year to 12.5 per cent to crack down on high inflation.
It has coupledthese measures with steps aimed at slowing rapid
credit growth that some analysts fear is
unsustainable.
On the political front, Ms Rousseff has been cleaning out
corruption at the transport ministry, firingofficials aligned with
a coalition partner of her Workers Party. Her political troubles
have beeninterpreted by the public as the spring cleaning of a new
president.
None of this is to say that Brazil does not have its own
challenges. A tight labour market, weakeducation system and a lack
of skilled workers are driving up wages while poor infrastructure
ispushing up costs.
Household debt levels are beginning to look unaffordable for
borrowers enjoying the fruits of a creditboom. Brazil needs to be
careful not to bury its new middle classes under so much debt that
when thenext economic downturn comes, they will sink back into
poverty.
The cost of doing business remains prohibitive, partly because
of high taxes and employment costs.And although commodity prices
have sky rocketed, export volumes have not. Brazil has mostly
usedthe bonanza from the global commodity boom to increase the
volume of its imports.
Brazil may feel justly proud of itself at the moment. But it
will need to remain vigilant to ensure that itdoes not sow the
seeds of the next crisis during the present period of
prosperity.
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