The Achilles’ Heel of the Brazilian Economy: High

Interest Rates in Brazil and the Need for Central Bank

Reform Could Bite Off President Lula’s Head and

Dampen his Reputation

With a massive labor force and abundant natural resources, Brazil normally has offered a promising environment for foreign investment. But all too often these expectations have proved hollow. Despite its numerous advantages, Brazil has suffered from chronically poor law enforcement, weak corporate governance and extremely high and unpredictable levels of inflation mainly caused by the legacy of an inefficient and corruption-prone government. The case of Henry Ford provides some insight. In the 1920s, Ford established an industrial town in the Amazon –Fordlândia– to cultivate rubber plants for the production of tires. Today, the town is abandoned; the project abjectly failed and ended up as a complete business disaster. This was mainly due to inappropriate management and the lack of support from a government that was wary of foreign investments. As The Economist notes, even the dubious wizardry of Goldman Sachs, the inventor of the expression “BRIC” (acronym for Brazil, Russia, India, China referring to developing countries with fast-growing economies and investment opportunities), faced real difficulties establishing a stable presence in the country. It was not until the economic reforms undertaken by the then Minister of Finance Fernando Enrique Cardoso in 1994 that Brazil was partially cured from the plagues assaulting its economy. Since then, Brazil has often been praised as a model of successful financial development, which is reflected by the high position it holds in the rankings published by the World Economic Forum (a non‐profit organization that surveys business environments throughout the world).

Yet at the same time, the Brazilian financial system is at a tipping point. From the Great Depression to the 1994 Mexican devaluation or even the 1998 Russian crisis, Brazil has often been more sensitive to financial crunches than other countries. But after two quarters of negative growth in 2009, Brazil has recovered remarkably well from the 2007-2010 global economic and financial crisis. While Brazil is now close to proving that it can compete with India and China as a model of a large and successful financial development, its growth is still significantly slowed down by its high interest rates. Here we will be examining the origins and the consequences of such high rates in order to see what policy recommendations might emerge for Brasilia to encourage further financial success for its economy.

For full article click here

This analysis was prepared by COHA Research Associate Felix Blossier