In a recent article (Brazil Steps Up Pace of Rate Increases as Inflation Hurts Growth), Bloomberg’s writers mention inflation as the reason why Brazil’s economy has stalled. So not true: Brazil’s growth was stalling before inflation became a problem. Why? Answer: Strong currency and low productivity.

The real continues to be overvalued, causing a “growth mismatch” that is affecting the economy and translating into a weak and uncompetitive manufacturing sector and relatively strong consumer spending, says Gray Newman, chief economist for Latin America at Morgan Stanely. He says the exchange rate has risen dramatically in the last ten years, but needed measures to increase productivity didn follow that movement. Mr. Newman says the way to stronger growth is betting on policies that increase productivity and not trying to manage the exchange rate.

Do you think the government wants to see Brazilians buying up Miami or investing their money domestically? I would argue for the second case. The outrageous consumer boom that led to Brazil’s economic growth between 2003 and 2011 will probably not repeat itself soon. It’s over. That was one of those (commodity) cycles that happens once every 30 years, when the inflows of foreign dollars from developed countries lift the fortunes of the local economy. Remember, China’s growth is waning… where will the dollars come from next?

There was no great emerging market that grew steadily in the back of a strong currency (China, anyone?). Low currency is what make exports attractive and generate growth. That was true for South Korea, China, etc.

Solution: Let the currency devalue, raise interest rates and design policies to improve productivity!

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