[PEN-L:704] Interpreting Brazil

[Colin Danby <danbyc@xxxxxxx>]

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