Perhaps I can make myself clearer if I offer a slightly more fleshed-out interpretation of events in Brazil. First a couple paragraphs from a PKT post the other week. " A skewed income distribution such as that suffered by Brazil is an inadequate basis for growth -- low and unstable consumption. Rather than deal with this directly, which would inevitably lower profit shares, Brazil's government (and others in Latin America if not elsewhere) has sought growth through exports, in which it hopes foreign direct investment will play a role (in Mexico bubble-led construction spending was important too but that's another post). Brazil also welcomed portfolio flows. Hence the familiar boom-bust cycle. Peg the exchange rate and, if the timing is right, draw in foreign capital. The capital inflows finance a lot of imports and, as the real exchange rate (RER) appreciates, raises real wages for a bit and creates an illusion of prosperity. But the whole thing is self-contradictory because the appreciating RER punishes exporters and the current acct becomes unsustainable. This is familiar to anyone who follows Latin America or for that matter Thailand. It is especially familiar to wealthy Brazilians who can see things coming to an end and are sensibly getting their money out. ... Brazil now looks a lot like Mexico in 1994. But if the IMF and foreign banks (who are complaining about the pressure) come up with enough dollars, and the national economy can be thrown into a deep enough recession to cut imports way back, the peg could hold. So what? either alternative is dreadful for most Brazilians. " So to put it in very crude terms, the model of drawing in foreign capital with a fixed exchange rate, with the attendant exchange rate collapses, is in fact highly functional for domestic elites. They do well during the boom phase, and the contraction hurts not them but workers. The political economy questions of how the system works and who is responsible are not easy and I do not want to argue that foreign financiers should bear no blame. But (1) as noted I think their role is usually small and (2) I worry that an emphasis on the Soroses lets domestic governments off the hook. Most broadly, the fact that real-sector problems often become manifest very vividly in the sphere of finance should not lead us into a sort of finance fetishism in which we imagine they are simply financial problems with financial solutions. Cardoso's record is not a pretty one, especially in regard to the ongoing repression of the rural poor, and this record is very much of a piece with policies that emphasize attracting foreign capital. Best, Colin
