When I moved here two years ago from London, I was shocked by the big increase in cost. Brazil is now an extremely expensive country, and it has been for a few years now. Numbers that came out last week ranking São Paulo the world’s 12th-most expensive city – above London, Paris, and New York – will come as no surprise to the embattled Paulista who must deal with the threats of $40 pizzas and menacing cell phone bills on a daily basis.

But around the world, old stereotypes die hard. Few gringos living abroad actually believe us. Brazil must be like Tijuana or Peru, they think. You know, Latin America. Wrong. Very wrong, as I explain today in the Los Angeles Times.

For those still clinging to the notion that South America provides cheap, exotic experiences for foreign visitors, arriving in Brazil these days can be a bit of shock.

Continue reading “Brazil may offer visitors thrills, but there’s nothing cheap about it” at LA Times

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Of course on an economic level, this will get the country absolutely nowhere. Though Obama was likely telling the truth when he said he understood Brazil’s concerns, he has plenty of his own. Unfortunately, on the list of considerations that end up dictating US monetary policy, the President’s relationship with Brazil may not be in the top 50.

But politics is about politics, and naming and shaming the US may be worthwhile sometimes. It was indeed the US that caused the financial crisis, and reminding them that the rest of the world suffers as a result could be good for diplomatic leverage.

Back at home, what can be done to save Brazilian manufacturing? What should be done? Fears about the death of industry have become the main political and economic concern in Brazil recently – I explored this issue quickly in the LA Times after workers took the streets last week – but opinion is divided.

Amongst economists, business leaders and government officials, there are three basic schools of thought.

1. Brazil’s manufacturing sector is fundamental to the country, and world-class. If it weren’t for unfair and unexpected developments coming from the US, China, and Europe, we’d be doing fine, and something needs to be done to combat those countries.

2. Brazil’s manufacturing sector is fundamental to the country. But despite the problems caused by the value of the dollar, the real problem is a lack of competitiveness, and the government needs to undertake radical reform to reduce costs in Brazil.

3. Forget it. Brazil doesn’t need to export manufactured products, and even if it did, long-term economic trends will make it impossible. Brazil should focus on managing the transition to a natural resources economy. That doesn’t have to be so bad, they say. Australia and Norway have managed quite well.

Position one is held by the government and by representatives of the industrial sectors. This is especially true if you judge them by their actions rather than their words. Both Dilma and market leaders do agree that reform is necessary, but actually trying to do it has so far been out of reach. It would be costly and politically difficult to improve infrastructure, reform the tax code, and adjust government expenses. What we’ve seen instead is the currency war and a set of stimulus packages for the struggling sectors.

Position two is held by some economists and business leaders that you might say belong to the “development” school. Brazil should be very worried about trying to exist on basic goods alone – the country worked very hard to overcome dependency on selling commodities, and we shouldn’t let that slip away. The government should do all that is possible, including everything listed above, to save the sectors.

Position three is held by a surprising amount of serious commentators, who might be called the “free market” or “comparative advantage” school. Yes, reform is needed all around, they say, but things will be getting even tougher for industrialists. In the long term, the dollar will drop more and more, and the pre-salt reserves will only exaggerate the circumstances in favor of commodities producers. History is not on your side. Deal with it and move on. Unsurprisingly, the fact that serious people even think this does not please either the government or most business leaders.

When Dilma gets back, this will be the debate she will be wading through for probably the rest of her presidency.

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Dilma’s government is willing to stand up to the big powers, it seems, and Brazil’s status on the world stage these days means she can get away with it.

First Dilma attacked rich countries – but specifically the European Central Bank – for unleashing a ‘tsunami’ of cheap money, much of which could make its way to Brazil, further pushing up the value of the currency and exacerbating the currency wars.

Right away, German Chancellor Angela Merkel said she understood Dilma’s concerns, and that they’d discuss them in their March 5 meeting.

Then, shortly after the US Air Force unexpectedly cancelled a contract to purchase Brazilian warplanes, the Ministry of Foreign affairs issued a very strongly worded statement:

“The Brazilian government learnt with surprise of the suspension of the bid process to purchase A-29 Super Tucano aircraft by the United States Air Force, in particular due to its manner and timing,” the communiqué reads.

“This development is not considered conducive to strengthening relations between the two countries on defence affairs.”

But by then General Chief of Staff Norton Schwartz had already said the cancellation was an “embarrassment” for the Air Force.

“There’s no way to put a happy face on this,” he said.

No, this was not a response to Brazil’s official statement, but it was a clear indication that parts of Washington know they gave Brazil a bit of a raw deal.

Of course, it’s one thing for the rich countries to play nice, and another to actually change European monetary policy, or restore the contract to buy the Embraer planes, to please Brazil. Neither is likely to happen.

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Guido Mantega, Brazil’s powerful finance minister, said this week that global economic growth will slow in 2012, leading to an intensification of the destructive “currency war”.

Does this mean that we may see more government intervention in the Brazilian exchange rate, or simply that Brazil has not tired of dishing out acerbic critiques of the US and Europe?

Mantega famously coined the term, “currency war”, in late 2010 to describe a change after the 2008 crisis, in which countries were fighting to weaken their currencies against each other. Since of course this is not possible for everyone, international cooperation breaks down and ominously, countries end up battling each other with policy instruments.

Basically, he was talking about the following:

After the crisis tore through the rich countries in 2008, they slashed their interest rates to zero, passed large stimulus packages, and then ended up turning to quantitative easing – essentially printing money – in an attempt to further boost the economy.

The flip-side of this is that a large amount of the capital previously invested in those countries was moved to countries like Brazil, where there was essentially no crisis, and rates of growth and interest were much higher. These huge inflows caused the Brazilian real to appreciate greatly, causing many to worry that the high cost of Brazilian exports would kill off manufacturing, or “de-industrialize” the country.

Mantega has been especially critical of quantitative easing in the US.

“It’s no use throwing dollars out of a helicopter,” he said in late 2010. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”

Brazil retaliated by intervening in currency markets and introducing a set of capital controls, making it more difficult and expensive to move money in and out of the country, putatively slowing down appreciation while certainly infuriating many international investors.

But since then the situation has complicated. Mantega made his recent remarks, the Wall Street Journal reported, at a meeting of finance ministers in Mexico City. These days, worries about the potential collapse of Europe are more predominant than currency concerns. The effect of that crisis has largely been to bring the Brazilian real back down somewhat, as global panic usually means a flow of investment into safe currencies like the dollar.

Mantega is no doubt right that this year could be a rocky one for the global economy. That this could lead to more effective devaluations in the US and Europe is quite possible, which could surely lead people like Mantega to take counter-actions.

Let’s hope he was warning against the possibility of intensification, rather than accurately predicting the future. Historically, competitive devaluations have not served us well.

Links

Story from the WSJ

FT: Mantega attacks QE 

LA Times: worries about “de-industrialization”

Wikipedia – A surprisingly hefty entry built around Mantega

Photo above – Mantega with IMF Chief Christine Lagarde

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