Home > Uncategorized > Brazil. An economy in crisis?

Brazil. An economy in crisis?

Brazil Christ Statue-1In my recent piece on the excellent book Breakout Nations, I noted that the author was probably the most critical of the mismanagement of the Brazilian economy. In his view, there was an over-reliance on commodities allied to an overspend on social welfare where the desperate requirement was for investment on the infrastructure. An infrastructure so poor that it was cheaper and quicker to import soya beans from China than from one part of Brazil to another.

The book was published three years ago and his predictions have come to pass

The prospects for the economy continue to look poor. Inflation is 7.5% and interest rates have been driven higher to 12.5% in an attempt to curb this. With growth down to virtually zero it is easy to imagine that the consequence of this will be a prolonged recession

Why is an economy which is clearly stalling and has been for some time, experiencing such relatively high rates of inflation? There are a number of factors (explained in detail here) including a fall in the value of the currency which has driven up import prices but also the simple fact that index linked minimum wage levels have driven up wages at unjustifiable rates, most especially in the public sector

The government was elected on firm promises to much of the electorate and naturally minimum wages and index linked rises were clearly going to appeal to a nation where much of the electorate is far from economically comfortable. Its a hard policy for opposition parties to campaign against, not least because the damage will be caused in the medium term rather than the short term. The catastrophic shambles that is Venezuela is a perfect example of mass appeal creating chaos. Brazil does increasing look like a version of Venezuela lite and this could be a hard lesson learnt.

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