Although I tend to agree with several points in the article by Joaquim Oliveira and Tristan Price (“Brazil: More Than Just Potential”, OECD Observer No. 228, September 2001), I fear the authors are too optimistic. The long-term view for Brazil has indeed improved over the past 10 years or so. But, unfortunately, we must cross endless short-term bridges to get there. There are various traps along the way, as well as several challenges.
First, growth remains constrained by the balance of payments – in spite of a substantial devaluation of the local currency vis-à-vis the US dollar over the past three years. Any hiccup in the world economy, any temporary rise in the risk-aversion of world financial investors, etc., bring this reality to the fore. The vulnerability of our external financing continues to haunt us, perhaps suggesting that we have not done enough in order to stimulate an “export culture” in the private sector and to convince trade partners (US-Europe) to reduce barriers to a wide number of our products.
Second, real interest rates are too high – at about 11-12% today. Managing the public sector finances with such high rates is almost impossible. The authors were absolutely correct to point out that “hard budget constraints have been imposed at all levels of government” and that the fiscal policy framework is much better now. Still, our public sector deficit remains at 2% to 3% per year, resulting from growing primary surpluses overshadowed by ever rising debt-servicing obligations. Total public sector debt now stands at about 55-60% of GDP and, with general electionsapproaching, talk of restructuring will inevitably pop up. Watch for nervousness in local financial markets, volatility, etc.
Third, political uncertainties will continue in the run-up to those general elections, due in October 2002, with concerns now raised about future economic policy direction and the commitment to reforms that favour long-term stability. I am sure that Brazil will tackle those challenges in its own unique manner. But the road ahead is bumpy and the “great future”, it seems, may still be a long way off.
Rio de Janeiro, Brazil
©OECD Observer No 229, November 2001