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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6 Responses to Bloomberg is wrong: It’s not inflation that’s killing Brazil’s growth, it’s the strong currency, stupid!

  1. mike says:

    what does improve productivity mean and why isnt increasing it a natural phenomenon? what is an example of a policy designed to improve productivity (successfully implemented)? Full heartedly agree on letting the currency tank, almost everything in this country is too expensive.

  2. blighter says:

    Very good post and, overall, a great blog (that comes from a regular reader). @mike: labour productivity can be improved in many ways: use of more sophisticated technology, more capital as well as other, soft factors such as individual’s motivational and behavioural factors. Brazil should definitely improve on areas such as education, lowering corruption, creating incentives for individuals to pursue their economic ambitions and goals. Btw, it’s Morgan *Stanley. ;-)

  3. Shaun says:

    A strong currency is a good thing. People are little educated in this matter. The US was the world power house and they had one of the strongest currencies in the world. Now they are struggling and their currency is dropping. What would you rather have?

  4. Jack Ganoza says:

    It’s not only monetary policy that could achieve the goal of raising productivity and increasing competitiveness.

    The real measures are the ones that effectively affect the real sector of the economy. Trade policy easing, labor market liberalization, and, a more freer stance towards markets in general, at large, will accomplish the goal. The levels of protectionism are absurd. None of the arguments for protectionism is met for the Brazilian case. Many decades of it has only created one of the more inefficient industries for the size of the economy.

    Structural reforms are needed. In the meantime, were these not even attempted and kept postponed, Brazil and its politicians will walk the endless charade of show and pretence that has dominated Brazilian culture since Brazil was invented.

  5. Enki Ea says:

    Look into a new BCCI type bank but this time around, its operational in Brazil.

    The outfit in question is Banco Paulista and its controlled subsidiary broker/dealer SOCOPA.

    This little bank, owned by a very traditional “Paulistano” family (the Vidigal family) has turned itself into the go to bank for money laundering, black market currency, corrupt politicians accounts, etc.

    They are even taking deposits (turned into cash usually within 48 hours) from known terrorist groups, known drug dealers, arms dealers, pirated/contraband goods dealers, etc.

    ± USD 400 Million per month comes from the triple frontier of Brazil/Paraguay/Argentina and into Banco Paulista in São Paulo. From there, they cash this money on a weekly basis and deliver it to the owners “Casas de Câmbio” to keep on moving. The bank is charging between 3% and 5% to cash out moneys and 20% to launder moneys.

    The Bank also charges a 3% flat feet to accept hard cash deposits of any source.

    Now the real deal is the black market currency exchange (known in Brazil as Doleiros).

    The bank uses its license to purchase official US Dollars from the Brazilian Central Bank (to the tune of US$ 10 million per day) therefore at official exchange rates and than sells the  same dollars in the black market (via fraudulent forex contracts). The focal point of distribution for the hard cash (both dollars and reais) is SOCOPA’s main office at Rua Funchal, 129  - 5º floor in São Paulo, Brazil.

    The person in charge of handing the cash over there is Mrs. Maria José

    There are four main “culprits” in this criminal activity:

    Alvaro Augusto Vidigal
    Alvaro Augusto de Freitas Vidigal
    Marcelo Pereira
    Tarcísio Rodrigues

    If one keeps an eye out on any regular day, they will see politicians, businessmen, regular people, criminals, etc., all going into SOCOPA to get their packets of cash.

    The authorities in São Paulo don’t care or at least pretend the issue does not exist and the local media is nowadays almost like in Venezuela (no reports involving politicians).

    If this gets the media it deserves, it has the power to bring down some top figures in the Financial World of Brazil and also some heavyweights from the political arena as well. Let’s not forget known/wanted criminals. 

    This little bank is a true “Atomic Bomb.”

  6. Brazilian Bubble says:

    It’s ok to have a strong currency if you’re already a developed country… if you are an emerging country, it’s the kiss of death. Look at China, South Korea, etc… they grew their exports on the back of weaker currencies and high exports. Otherwise, how are you going to export if your currency is too strong? For Brazil, the solution is to devalue the Real, period. The US was living a bull market with a strong currency when the world was not as connected as now… it was importing cheap and dominating big item industries (i.e. autos).

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