How Busted Is Brazil?

Essay

Bearish on Brazil

Ruchir Sharma

Until recently, there seemed plenty of reasons to be bullish on Brazil. Having posted record growth for a decade and weathered the financial crisis well, the country looked poised to become a global economic leader. But the would-be giant stands on feet of clay. The economy depends too much on high commodity prices, and as demand falls, so may Brazil.

Snapshot

Brazil's Legal Education

Juan de Onis

In November, former Brazilian President Luiz Inacio Lula da Silva's closest adviser was sentenced to ten years in jail for corruption. Now, the highest court seems determined to go after Lula himself. Whatever the final result, the judges' campaign has convinced Brazil's taxpaying middle class that it is time to stop tolerating graft.

(UggBoy / flickr)

STABILITY IS SUCCESS
Shannon O'Neil

Ruchir Sharma ("Bearish on Brazil," May/June 2012) argues that Brazil's incredible rise over the past ten years has depended on the sale of commodities, and that as commodity markets begin to slow, so, too, will Brazil's growth. Sharma correctly notes that in the coming years, Brazil will likely need to confront a decline in commodity purchases from China. But he fails to recognize that economic stability has also driven Brazil's growth.

Throughout the late twentieth century, Brazil suffered from failed stabilization policies and devastating bouts of hyperinflation. In 1994, however, Brazil introduced a new currency, the real, which has kept inflation in check. Around this time, the government also began lowering tariffs, opening up markets, and privatizing industries, policies entrenched over the next decade by former Brazilian President Luiz Inácio Lula da Silva. These reforms convinced local and international skeptics that Brazil would not return to the days of closed markets and inflation­ -- an evolution that, more so than the commodity craze, has spurred Brazil's economic boom over the last decade. 

Sharma argues that the very measures Brazil has taken to reach this stability will hold the country back. In particular, he claims that Brazil's spending on welfare programs, such as Bolsa Família, an initiative that provides cash transfers to low-income parents who get their children vaccinated and keep them in school, has reduced inequality at the expense of development. Yet history suggests that to achieve sustainable growth, governments must care for the young, the old, and the less fortunate. European countries and the United States began building their own social safety nets at far lower levels of per capita income than those of emerging-market states today, thus expanding productivity and boosting demand. Indeed, numerous studies conducted by the World Bank and others suggest that the reduction of inequality in middle-income countries, such as Brazil, actually boosts economic progress...