At Large

Brazil Stumbles

Don't believe the hype. Socialism still doesn't work in Latin America.

By 8.8.11

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Former President Luiz Inácio Lula da Silva's much-heralded plan to tie Brazil's social welfare grants to government-subsidized credit was cited as pulling that country into more equitable economic management. Lula da Silva (2003-2010) became the darling of socialists in general and fellow unionists in particular not only in Brazil but throughout Latin America. His preferred successor and former chief of staff Dilma Rouseff inherited a highly-touted and apparently rocketing economy.

The current portrait of Brazil -- as a successful model for all of Latin America's underachieving economies -- certainly factored into its selection to host the Olympics in 2016 (just two years after it will host soccer's World Cup in 2014). The winner of the Olympic site competition traditionally enjoys new economic impetus, and in Brazil this is supposed to be the icing on Lula's legacy.

But maybe that legacy is already a little inflated.

Perhaps most important to the planned socialist future of Brazil is the reconstruction of the massive and densely populated favela (slums). These decrepit neighborhoods harbor the vast number of Brazil's poorest urban citizens and the self-multiplying criminal activity that so dominates Rio de Janeiro and other cities. The government proudly has cited the substantial improvement in living conditions in the sprawling favela.  Unfortunately, the oft-mentioned but rarely-audited crime statistics do not inspire confidence.

Corruption remains a drag on the national economy and shows no sign of diminishing. One journalist characterized the various versions of Brazilian corruption as "the lubricant that makes the donkey cart roll." (Apparently this has a more impressive connotation in Portuguese.) In any case the meaning is the same: whether one is speaking of major contracts or simple everyday commerce, the various ramifications of bribery are part of Brazil's traditional system. Lula and his followers never changed that.

There is no question that prosperity has boomed since Lula's "new economy" achieved what some have characterized as "an Asian-like pace." So how was it all possible? Naturally the Left has credited the progress to sound socialist planning and development. Actually the planning had far less to do with any success that occurred during Lula's time in office than it did with the extraordinary rise in commodity prices.

Communist China early on became Lula's new best friend as Beijing began buying every raw material and agricultural product Brazil had to offer, even while the prices soared. As a partial result the Brazilian real increased in value about 46% in two and a half years as the national economy grew at a phenomenal 7.5% up to last January 2011.

Unfortunately for now-President Rousseff, the program of "Lulismo" hasn't served her and Brazil that well. The current account deficit of 2.3% of GDP that Brazil had run in the first half of this year has been made up by foreign investors seeking to cash in on the country's perceived growth. The problem is that the deficit keeps widening as Brazil continues to pay for its material appetites. The consensus among analysts is that Brazil needs to press forward with its own investment in order to build its infrastructure and improve productivity. It isn't happening, however, at an adequate and influential rate.

Foreign investment in the Brazilian stock market has fallen off 70% in the first half of 2011. It's true that the previous year had abnormal growth, but this current drop is very serious. Credit growth has slowed and inflation has increased. Meanwhile, the inclination of strong governmental involvement in private enterprise in various sectors has further dampened foreign investment interest. Inflation has forced benchmark interest rates to 12.5% and rising.

Over-ambitious development has been the stimulus to inflation. Finished-product imports from such trading partners as China have outstripped any balance in exports. Brazil doesn't even have adequate fertilizer production, and that kind of thing hurts its agricultural exports. But the biggest shortfall has been in the field of petroleum production from its Obama-lauded deep well off-shore drilling. Far more outside investment is necessary to profitably exploit these considerable oil reserves. And here is where Lula's famous tight government oversight and control (read: socialist management) comes into negative play.

It may seem a bit unfair to rain on Brazil's parade, but just as Lula's personality drove the success of his presidency, that same flamboyance obscured the reality of his country's shortfalls. By focusing on easily accessible credit for low-income and no-income households, there has been a burgeoning of the availability of all manner of consumer-oriented products. Government-backed credit facilities encouraged buying that in turn manifested the illusion of general well-being. Ultimately, even though the economy gave the appearance of blossoming, it was not because of real structural changes but rather speculative investment based on a perception of broad economic gains. Without the confluence of a historic rise in commodity prices and massive orders for raw materials by China, Lulismo had no real base.

Inevitably inflation has pricked the credit bubble, forcing a tightening of monetary policy and thus restricting access to the past's extravagantly affordable lending rates. The consumers, especially the least advantaged, have lost their ability to keep up their newly found ability to buy. An environment of substantial interest rate rises is now too burdensome to sustain the high level of investment necessary to keep Brazil's economic pot boiling. Things may turn around again come Olympic time, but it certainly won't be because of Lulismo or any other game of political mirrors.

The illusion of Lulismo may still exist across Latin America, but not in the more financially hard-nosed environment of European and Asian financial capitals. Caution is the word when it comes to Brazil -- in spite of the charm and fashionable socialist objectives of Luiz Inácio Lula da Silva and his political heiress, Dilma Rousseff.

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About the Author
George H. Wittman writes a weekly column on international affairs for The American Spectator online. He was the founding chairman of the National Institute for Public Policy.