Tom Walker asked me what was going on in Brazil, since I'd just visited
and talked with many economists. Thought this might be of more general
interest.
Wrote Tom:
>My impression from just looking at the newswire numbers was that the focus
>of the storm was shifting to Brazil. What does it look like on the ground
there?
>
Absolutely, they have the feeling of being beseiged. The global financial
crisis is
the ONLY story in Brazil now. Their BOVESPA index has lost over 40% in the
past month. The Cardoso regime is in a real pickle. Elections are coming in
October -- I think about the middle of the month. Fernando Enrique (as
the Brazilians call him) is far ahead of Lula and other competition -- the
crisis is not changing that calculus. But Cardoso is committed to the
Real/$ peg,
and thus must avoid actions that rock the boat at all. The markets are
focusing on
Brazil's 7.5%-of-GDP federal deficit, as an excuse to hammer the SP markets.
But the budget is balanced in terms of expenditure; the deficit is due to the
legacy of overseas borrowing.
An interview in Sunday's
Jornal do Brasil with M.Claire Pastore, the former Bank-of-Brazil head, was
amazingly frank. He said, the 7% of GDP deficit can maybe be reduced to 3%
in four years, but only if growth continues. The govt has projected 4% growth,
but 2% would be a blessing at this point. Pastore went on to say, in
response to
a reporter's question, absolutely we are in recession -- this is, going into the
possible meltdown phase of the crisis. UE, eg, is 20% officially. Brazil
is well
positioned now to exploit export possibilities, but there are essentially
none out
there. The exchange-balance math is, $40 bn trade deficit, offset by about $20
bn in capital inflows from privatizations (which have been controversial).
There
are about $55 bn in reserves remaining, as a guess. So either they have to find
another $20 bn to balance the accounts, or lose more reserves. Yesterday's
WSJ had a feature on Cardoso -- his plan is to attract more capital inflows by
holding the line and privatizing more. Banks in particular are taking
position in
Brazil. But the panic in the markets is throwing all these plans off.
As for the "person in the street", the situation is more like Japan than Korea,
in the sense that they've had stagnation for a long time. They are only now
beginning to crawl out of the hole. The problems of polarization of wealth,
income, and opportunity have stretched everything to the limit. The malls
with high-priced imported consumer durables are beginning to experience a
real hit, as the upper classes pull in due to wealth effects there. Some
interesting
microcredit and other social initiatives have been proceeding, but these may get
lost in the maelstrom.
I read an interesting paper by Christina Penido and a coauthor (sorry, paper
is at school and I don't remember her name), which shows clearly that Brazil,
Argentina and Mexico have taken very different paths to financial liberalization
in the 1990s. If you check out the trends in capital flows and market prices,
however, you'll see that all three countries are being hit in the same way.
That
is, it's about a flight from the South, not about market structures and
rules. So
Fernando Henrique may fiddle, but will anyone dance?
At the end of my second seminar at the Federal University of Rio, I gave
a bleak assessment of the policy options open to Brazil at this point. Fernando
Carvalho, my host, began his comment by saying, "I think I am even more
pessimistic than you".
By the way, for those interested in checking out some of the trends:
A really interesting source for such gawking, if an incomplete one for
developing markets, is www. bigcharts.com, which readily pulls up
historical data in graphical form.
Gary
Gary Dymski
Department of Economics
University of California, Riverside
Riverside, CA 92521-0427
Phone: 909-787-5037 x1570
Fax: 909-787-5685
Email: [EMAIL PROTECTED] (office)
[EMAIL PROTECTED] (home)
