In a great interview to Estadao newspaper, economist Edmar Bacha, known by many for being the “Father of the Brazilian Real”, warned of the risks of depending on raw materials and advocated for a more diversified Brazilian economy (we have already mentioned Petrobras’ CFO’s comments about Brazil being close to catching the Dutch disease).

Interview highlights below…

Managing Brazilian wealth from commodities

“I think that the danger is that we may not know how to manage the wealth of the natural resources we have. A wealth that will be greater in the future with the exploitation of petroleum (found in very deep waters off the Brazilian coast),” Bacha said.

He also said that it is necessary to take measures so as not to fall into the “curse of natural resources” suffered by countries like Venezuela and Argentina when the discovery of raw materials created sudden wealth “that is not the fruit of previous work, of the accumulation of capital or the improvement of human resources.”

Savings, Chile and Norway

According to him, the solution lies in “using this great opportunity of increasing raw materials to increase the savings rate and invest not only in infrastructure, but also in the diversification of the economy and the improvement of education.”

“Because in that way, at some time we will have a more solid economy that will not depend only on raw materials,” the economist said, adding that the keys to sustainable growth are “savings, technology and education.”

Bacha pointed to Chile and Norway as examples of the good management of natural resources, countries that created sovereign wealth funds that do not allow overvaluation of the currency and in which the returns are used to promote economic diversification. “These two countries have set up sovereign wealth funds, which do not allow overvaluation of the currency because the money is abroad, and governments use only the income, not the principal amount of funds.”

Commodity prices to keep rising…

The prices of raw materials, although they can suffer temporary setbacks due to the crisis the industrialized countries are going through, will keep rising because of demand from countries such as China and India, Bacha said, adding that the present period is an “Asia-centric” era.

Brazil issues and other comments

“We have serious problems. The quality of education is terrible and we’re not a very innovative country. Also, the savings rate is very low,” Bacha said.

Brazil’s economy, according to the latest estimates, grew about 3 percent in 2011, markedly less than the 7.5 percent expansion experienced in 2010. “In the long run, do not see how we grow more than 4% (per year).”

The growth of Brazil’s gross domestic product in recent years has resulted in large measure from raw materials exports, which bring foreign currency into the country and consequently result in the revaluation of the real. 

Asia “Bull”

The upward trend in commodity demand and prices will continue because we are living in an era where a set of Asian countries with huge populations and growing income has an enormous shortage of natural resources. 

“Dutch Disease” and wealth management

When you have blessings (natural resources), you may decide to stop working and enjoy life, so to speak. This is a danger. There are empirical studies of local governments, which benefited from oil royalties, that performed much worse than others with no oil whatsoever. A great example is Nigeria, which had dissipation of oil wealth through its extraordinary corruption. 
If you do not do the right thing, two bad things can happen: inflation and overvalued currency… it causes unwanted deindustrialization.

Brazil’s development

… (if well managed) at some point, we have a strong economy not only depends more commodities. Examples in the world are the United States, Sweden, Finland… they do not have exclusive dependence on natural resources but these resources were well used to develop the economy. But the problem is that we in Brazil are not using the opportunities that were created to increase the savings rate in the country. We have serious problems. The quality of education is poor. And we are a country with very little innovation. Overall, the country’s savings rate is very low. And these are the three main ingredients for sustainable growth: savings, technology and education.  
Petrobras monopoly: Criticism to the Brazilian oil model
There is an excessive burden on Petrobras (NYSE: PBR), which is not keeping up with the amount of projects it currently has on its plate…. and the government still requires its presence in all explorations and that it stays as the only operator. This requires more business resources than the company can deliver. The financial markets agree with what I say, just see its stock price. 
How to manage an oil sovereign fund
The royalties would be deposited in a fund whose principal asset is not used except in emergencies, or as a defense against volatile periods when prices fall suddenly. Chile has made this in 2008: it spent part of its fund when copper prices fell sharply.  
Do not tax the commodities: just look at how pathetic is Argentina’s model 
The iron ore could perhaps be taxed. But agriculture does not generate this kind of extraordinary income. There are those who want to tax all commodities in Brazil, but that’s bullshit. This is like killing the goose that lays the golden eggs. This is what Argentina did. And Argentina is a pathetic example of how, by mismanaging natural resources, a rich country can become a poor country.
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