Ever since, Brazil has been winning the race. The government has tamed inflation and unemployment and put the books in the black. And even as the world economy has slowed, Brazil’s has looked fit and fortunate.
No longer. Just the other day, the cardinals of high finance were saying last rites for Argentina. Now everyone is praying for Brazil, too. The latest troubles began in December, when Buenos Aires’s brush with default had much of the Third World bracing for a knock-on effect–nowhere more than Brazil, where the real went into a tailspin and investors scrambled for the cashier. But that was just the beginning. By May a corruption scandal festering in Congress drove two key lawmakers from office (for allegedly stealing a look at secret Senate votes) and virtually paralyzed the legislature. Worse, Brasilia finally owned up to a colossal energy crisis, dashing the nascent recovery and threatening to leave 170 million people in the dark. Brazil boosters have become Brazil bashers. Says Walter Molano, a financial analyst with U.S.-based BCP Securities: “We are rewriting all our predictions.”
Just how far Brazil will fall is a matter of intense speculation. In early 2001 the economy was on track to expand by at least 4 percent. Brazil led the developing world in foreign direct investment, pulling in $60 billion in 1999 and 2000. Now the brightest estimates are 2.5 percent growth, with foreign investment falling to $16 billion. And spiking energy rates and a shrinking real could dim the outlook.
With a paltry savings rate–20 percent of GDP–Brazil will continue to depend on other people’s money to make ends meet. But with general elections looming in October 2002, creditors are demanding scorching interest rates to finance short-term government debt. Brazilians are bracing for rising prices, idle factories, power outages and a gale of “blue slips,” the dreaded layoff notices.
For Brazil, the fall from grace is especially frustrating. It is not only Latin America’s megamarket, with a $700 billion GDP, but a “country on the move,” a breathless John Dos Passos once wrote. Its economy has led all major economies in growth since 1870, multiplying its output 108 times to 1995, according to respected world economist Angus Maddison.
Brazil may look stalled today, but few predict it will land in straits as dire as Argentina’s. Both countries have shed ailing state enterprises, halted hyperinflation, modernized banks and opened their economies to the world–but when Brazil let the real float in 1999, the dollar-pegged peso turned into an anchor, making exports dear and halting growth. Moreover, in Brazil, a new law holds states and towns liable for bills they once pawned off on the federal treasury. As a result, even in the maw of crisis, signs of recovery abound. As industry suffers, agriculture grows. After a year-long decline, exports, especially factory goods, are rising.
The Argentines are watching all this closely. Brazil is their biggest trading partner and the only major nation with which they enjoy a trade surplus. If investors flee Brazil, they’ll flee the region, so Brazil’s bust probably would not become its rival’s bonanza. On the contrary, any sign of resilience in Brazil is good news for all Latin America–especially Argentina.
