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BRAZIL: "Brazil — A Country of Regeneration" report

BRAZIL: "Brazil — A Country of Regeneration" report. Article by A.T. Kearney.

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back to index backLATINtalk January,  2006

Brazil -- yes, Brazil -- is an emerging role model

For readers of this column who say I've been too skeptical about Latin America's economic recovery lately, by pinning it largely to external factors, here is some good news on the domestic front: Brazil is emerging as a role model of stability in a region long hurt by wild political and economic swings.

What? Brazil, the country where left-of-center President Luiz Inácio Lula da Silva's government has been rocked by a bribes-for-votes scandal in Congress? The nation where the president's chief of staff, Cabinet ministers and congressional leaders have been ousted recently amid a barrage of corruption charges?

Indeed. Brazil, by far South America's biggest and most important country, is bucking what has historically been one of Latin America's biggest obstacles to economic growth: political uncertainty, which has long triggered capital flight and economic declines. This time, Brazil's economy appears to have been shielded from the ruling party's political scandals.

Last week, while the corruption scandal still dominated the front pages, Brazil issued for the first time a $1.5 billion local currency denominated bond in international markets, and it found more buyers than it could accommodate. Usually, governments of emerging countries that need money issue bonds in U.S. dollars in the world market, or do it in their local currencies at home.


U.S. Treasury Secretary John Snow cited it as a sign of economic success, saying the bond sale showed the financial market's enthusiasm over the ''stewardship'' of Brazil's economy. Brazil's finance minister, Antonio Palocci, added that this is ``the beginning of a long cycle of growth for his country.''

The main reason for optimism is that Brazil's left-of-center government has not only maintained the free-market policies it inherited from its predecessor, but has also further opened its economy, restrained public spending and kept inflation from growing. Amid the positive signs:

• Brazil's Bovespa stock market has risen by about 20 percent so far this year. By comparison, the U.S. Dow Jones Industrial Average has dropped by about 2 percent..

• Brazil's currency, the real, has strengthened against the U.S. dollar, from about three reals to the dollar at the beginning of the year to about 2.27 reals to the dollar today. While that's bad news for Brazil's manufacturing exporters, it's good news for Brazilian workers' real wages.

• Brazil's trade surplus has risen from $32 billion last year to about $41 billion this year.

• Foreign direct investment has remained stable, at around $16 billion. Economic growth is projected at about 3.3 percent this year, about 3 percent in 2006 and 3.5 percent in 2007.

''It's impressive, considering the severity of the political crisis,'' says Paulo Leme, chief emerging markets economist for Goldman Sachs.

Granted, not all the good news is of Brazil's own doing. A favorable world economic environment -- high commodity prices for Brazil's agricultural exports, low interest rates for its foreign debt payments and the emergence of China as a major trade partner -- has helped Brazil. In addition, much of the foreign investment we are seeing now may have been in the pipeline, and we may see a slowdown in new investment as the electoral campaign heats up for the October 2006 elections.


And what may be even more worrying: Lula da Silva's fall in the polls is bad news for Latin American politics, because he represented the best hope in the region for the resurgence of a modern, pragmatic left. While Chile's left-of-center is seen in much of the world as a Latin American model of development, many in the region see Chile as too small to set an example.

Since the corruption scandals shook the Lula da Silva government in recent months, Brazil's diplomatic clout in the region has been eroded, and an increasingly radical Venezuelan President Hugo Chávez is beginning to fill that void. A weaker Brazil opens the door to a stronger Venezuela.

My conclusion: Regardless of whether Lula da Silva is re-elected next year or not, the fact that he has not yielded to populist temptations is excellent news. In a region known for wild economic experiments that almost always end in disaster, the fact that the biggest country stays the course and succeeds could turn into a new role model for the region.

Source: ANDRES OPPENHEIMER column in The Miami Herald - GAI

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