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
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.
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