The "BRICS" Propose a New Multilateral Bank

Sources:
BRICS Joint Statistical Report: Economic and Social Indicators Comparison of BRICS Countries
International News, The: World Bank Chief Backs BRICS Idea
Macau Daily Times: Rising Powers Mull Bank for Developing Nations
Telegraph, The: Robert Zoellick Calls for BRICS Bank

Brazil, Russia, India, China, and South Africa, collectively known as the “BRICS,” are five of the most important emerging economies. At their joint financial summit in New Delhi during the week of March 27, 2012, the BRICS officially proposed a new developmental bank, which would serve as an alternative to other development banks such as the World Bank. The outgoing World Bank president, Robert Zoellick, said that he would support a World Bank program to work with the BRICS to make their plan for a new bank a reality. Such a move would not be unprecedented, as the World Bank has previously assisted in the creation of the Islamic Development Bank and the OPEC Fund.

Zoellick does not believe that ignoring the BRICS is a good economic decision, as the countries are already serious players in the world economy. Collectively they account for 18% of the world’s GDP, 40% of the world’s population, 15% of global trade, and 40% of global currency reserves. Many financial experts expect the BRICS’s economies and political influence to continue growing in the future.

Some political experts view President Obama’s nomination of an American to lead the World Bank (instead of a person from the BRICS or another emerging economy) as adding momentum to a BRICS bank. The BRICS believe that the World Bank does not effectively address the unique needs of developing countries. They believe that a World Bank president from an emerging market economy could help address this issues. However, Obama’s nomination of an American is in line with past practice, as an American has always been the leader of the World Bank. The BRICS bank would focus on middle-income countries and be largely free from the political influences of advanced economies.

However, political experts are concerned that because the BRICS do not have one coherent foreign policy, it will be difficult for the countries to pool their economic resources and settle on an aid strategy. The lack of agreement was recently demonstrated when the BRICS failed to unite behind one nominee for World Bank president. Political experts are also concerned about the vast difference in economic power between the BRICS. For example, Brazil’s GDP was $2,090 billion in 2010, while China’s was $5,879 billion, India’s was $1,293 billion, Russia’s was $1,465 billion, and South Africa’s was $363 billion. China also has $3.2 billion in foreign currency reserves, an amount much higher than any of the other BRICS. Because China has the largest economy and currency reserves, it will likely want to permanently lead the bank—a proposal that India and Russia would likely reject. Additionally, unlike the World Bank, where the leadership generally consists of democracies, the BRICS bank would represent an authoritarian government (China), a quasi-democratic government (Russia), and several democracies (India, Brazil, and South Africa).

With the fast-growing economies of the BRICS, the countries have the funds and political will necessary to create their own development bank. However, the exact structure of that bank and the World Bank’s potential role in its creation remain unclear. While the BRICS have numerous differences, both political and economic, a developmental bank backed by the five countries’ immense economic power would have the ability do much good in the world.

Uruguay’s Economic Recovery through Innovative Policies

Sources:
World Bank - Country Partnership Strategy for the Republic of Uruguay
World Bank - Uruguay: From Crisis to Opportunity
U.S. Dept of State - Uruguay's Economy


Uruguay has come a long way since 2002, when it faced one of the steepest economic and financial crises to hit the country in a decade. The Argentine withdrawals from Uruguayan banks and the devaluation of Brazil’s currency caused Uruguayan goods to become less competitive. All these factors, along with the outbreak of foot and mouth disease, led to massive amounts of borrowing from international institutions and financial instability in the country. However, despite the severity of the crisis, Uruguay’s economy has bounced back, in large part due to the aid of the World Bank.

According to a recent World Bank report, Uruguay has proven very successful in its implementation of the Bank’s initiatives to bolster economic and social recovery. Poverty rates have decreased, the national debt reduced, and the health care system underwent significant reforms. In addition, the Bank also helped Uruguay to eliminate foot and mouth disease, boosting the country’s image as a reliable beef exporter.

The reforms proposed by the World Bank included structural changes and short-term stabilization policies as a way to shield the country from external economic shocks. These policies included strengthening the financial sector through a flexible menu of lending and non-lending services, developing local capital markets through innovation and infrastructure, and finally, cutting the external debt and reducing the role of the US dollar in the local economy. The Bank also sought to provide financial and technical support to Uruguay by providing loans in local currency and lowering the cost of financing.

Supported by the Bank’s program, Uruguay’s economy achieved a 6.6 percent growth on average from 2004 to 2008 and poverty declined by nearly 39 percent over the last 8 years. Public debt had decreased from 79.3 percent of Gross Domestic Product in 2005 to 60 percent in 2009. Also, with the aid of the Bank-financed Non-Transmittable Diseases Project, Uruguay was able to restructure its health system in order to include more accessible primary care services to the population.

South Florida’s Global Trade Expands

Sources:
The Miami Herald: South Florida's Global Impact Expands ; Brazil's Importance to South Florida's Economy ; Trade Through South Florida Ports Sets Records
The Business Journal: South Florida Global Trade Poised to Hit $100B
World City: U.S. Trade Tops $3 Trillion in 2010


The area of South Florida is not just known for its great beaches and tourist destinations, but it is also one of the main entrances into the United States for imports from Latin America and the world. South Florida is unique among the nation's customs districts in that about 60 percent of its total trade ($95.38 billion) is driven by exports, as compared to the national U.S. exports to imports ratio of 40 percent to exports and 60 percent to imports. The strength of South Florida’s export-driven economy illustrates the region's role in supplying the market demands of Latin America and the Caribbean.

The area’s top exports include aircrafts, precious scrap metal, cellular phones and equipment, and computers and computer parts. Its top imports include gold, non-crude oil, cellular phone equipment, and computer parts. In addition, $366 million worth of live crustaceans and $691 million worth of fresh-cut flowers came in through ports of South Florida.

The Miami Customs District, which includes airports and seaports from Palm Beach to Key West, set a record among customs districts for the greatest total trade, which reached $95.38 billion last year. Of this, exports totaled $58.8 billion and imports amounted to $36.6 billion. The trade total in this region is now well on its way to surpass, for the first time this year, the $100 billion figure. The area will be only the 11th Customs District in the country to do so.

The majority of the goods exported by South Florida are sent to countries in Latin America. In 2010, the area exported $11.9 billion to Brazil, $4.1 billion to Colombia, $4.07 billion to Venezuela, and significant amounts to other Latin American countries such as Costa Rica, Dominican Republic, Honduras, Chile and Mexico. South Florida also exports to European countries significantly, it exported $4.99 billion worth of goods to Switzerland in 2010.

Among South Florida’s top trading partners, Brazil is by far at the top of the list. In 2010, Florida’s export trade with Brazil increased by 27 percent from the previous year, to a record of $14.4 billion. Similarly, the area imported $1.47 billion from Brazil. This increase in trade is due to a 7.5 percent economic growth and the increasing consumer demand that Brazil is currently facing. Also, Brazilian tourists spend more money in South Florida than in any other part of the country. Thirty-five percent of real estate buyers in downtown Miami are Brazilians.

Likewise, many Asian companies are directly investing in South Florida. For instance, Hong Kong’s Swire Group recently announced a new construction project, Brickell CitiCentre, in downtown Miami, valued at $700 million. Genting Group, a Malaysian company, also plans to build a $3 billion resort called World Miami. These investments are expected to bring in more visitors and increase South Florida’s global trade as additional goods will be imported to satisfy the visitors’ demands.

Brazil’s Economic Success leads to Inflation

Sources:
FT: Brazil resolute on rate rises to calm inflation
WSJ: Price of Success in Brazil: $15 Movies
IMF: Watching Out for Overheating in Latin America
CIA: World Fact Book, GDP Real Growth Rate

Over the past few years, Brazil’s Gross Domestic Product (GDP) has steadily increased, going from 3.70% in 2006, to 5.10% in 2008, and reaching 7.50% in 2010, making Brazil’s economy one of the most stable, and the country itself one of the wealthiest in South America and the western hemisphere. However, this success has not come without a price, as Brazil’s cities have become some of the most expensive in the world. The Wall Street Journal reported that Brazilians pay the equivalent of $15 for a movie, which is more than New Yorkers pay. Likewise, the jump in the price of food, transportation, and land has resulted in the inability of millions of poor Brazilians to maintain their standard of living as their income remains unchanged but the price of items continue to rise.

One reason for these rising prices is Brazil’s increasing inflation rate, which currently stands at 6.4%. In a statement issued earlier this month, President of Banco Central de Brazil, Alexandre Tombini, stated that Brazil will continue to increase interest rates for as long as necessary in order to drive inflation down to the target rate of 4.5% by 2012. The government continues to use conventional monetary policy in its effort to reach this goal. Such policy includes increasing taxes on lending and financial transactions in order to dissuade the flow of “hot money,” or speculative investments,into Brazil from abroad. “Hot money” occurs when investors attempt to ensure high short-term interest rates by taking their money from low interest rate yielding countries into higher interest rates countries as a way to obtain higher returns. Also, it can lead to lower savings rates and cause rapid overvaluation of the currency. These type of investments are particularly troublesome because as investors pull their money out of one country, in an attempt to profit off the exchange rate, it can shock the economic system and cause instability in that country. Likewise, speculative investments can lead to bubbles in certain economic markets such as real estate.

Two weeks ago, Brazil’s central bank increased interest rates by twenty-five basis points, to 12%. The increased interest rates will help to reduce the growth of demand in the economy, which in turn will slow growth and reduce inflation. Higher interest rates will reduce consumer spending by increasing the cost of borrowing and making it more attractive for citizens to save money. Although it is expected that such measures will decrease the month-on-month inflation starting as early as this month, the annual inflation rate might still continue to rise in comparison to the lower inflation rate of the corresponding period in the previous year. Nonetheless, for the time being, there is no indication that the Brazilian government will implement harsher capital controls such as the imposition of “quarantine on foreign investment” which, if implemented, would force investors to deposit a portion of their money with the central bank for a period of time.

Brazil is not the only country facing inflation and the risk of an overheating economy. In a report issued earlier this month, the head of the International Monetary Fund’s (IMF) Western Hemisphere Department, Nicolas Eyzaguirre, warned about the overheating risks facing many countries in Latin America.Rapid economic growth leading to an increase in demand and high levels of inflation are the main causes of an overheating economy. The problem is that if these overheating risks are not addressed, they can eventually lead to a recession. There are early signs of overheating problems in Latin American where countries that are facing rapid economic growth coupled with an expanding domestic demand, which has already led to inflation in much of the region. Although many central banks are increasing interest rates in order to deal with this problem, it is likely that more rate increases will be necessary in the future to contain much of the demand pressures.

Some Fear Potential Brazilian Credit Crisis

FT: Brazil May Be Heading for a Subprime Crisis

FT: Pace of Credit Surge Fuels Brazil Worries

FT: Fraga Warns on Brazilian Credit Growth

FT: Tempo Hots Up for Brazil's Banks

Investopedia: Recapitalization

UPI: No Risk of a Credit Bubble, Says Brazilian Banker

More Brazilians have begun borrowing to purchase everything from school supplies to liposuction, and analysts worry Brazil is headed toward a credit crisis.

Many Brazilians are in the rising middle class and are spending more money on credit than ever. Brazilians have little financial education, but banks have expanded lending to include the growing middle class. In the past ten years, the number of credit cards in Brazil has increased from 28 million to 153 million, and credit card sales rose from $26.7 billion to $186 billion.

Although Brazilian inflation has fallen, interest rates remain extremely high, and banks are profiting greatly from these rates. Private individual interest rates on loans and credit cards are around 20 to 30 percent, but some may be as high as 40 percent. Many Brazilian banks reported huge gains for the previous two years as the amount of credit in the economy has risen from 22 percent of GDP in 2002 to 47 percent today. Defenders of the Brazilian economy are quick to point out that some countries have higher levels of private debt. For example, the United States’ private debt is 165 percent of GDP. However, others still worry this rapid increase in lending in Brazil is creating a “bubble” similar to the one that burst in the United States.

The average individual debt service burden has risen to 24 percent in Brazil, compared to 14 percent in the United States when the subprime mortgage crisis occurred (it is now 12 percent in the United States). The debt service burden for individuals is the percentage of income necessary to repay both the interest and principal on a loan. This means compared to a U.S. consumer, the Brazilian consumer has twice the ratio of debt payments to income. Because of this statistic, many analysts are concerned about a similar, or even worse, credit crisis occurring in Brazil.

Another concern is that Brazil does not have a positive credit bureau that shares credit histories of all consumers (as opposed to a negative credit bureau which only reports on creditors in default). Therefore, Brazil’s system enables consumers to borrow on multiple credit lines without the lenders’ knowledge.

Brazil also has a low savings rate. A country with a low savings rate signifies that not only are consumers probably buying on credit, but also that they will be unable to pay back the loans. In a country like Brazil that does not report credit history, the consumers will be free to continue borrowing, even if they cannot pay back previous loans.

The president and CEO of Brazil’s largest private bank, ItauUnibanco, denied that Brazil is heading into a credit crisis and stated that lending was under control. Nonetheless, commentators continue to compare his actions and similar statements by other banks reporting high profits (in 2010, ItauUnibanco reported record net profit for private banks) to those that occurred before the U.S. sub-prime mortgage crisis.

Analysts warn that signs of trouble are already apparent. In November 2010, when a small bank, Panamericano, was found to be misrepresenting its consumer credit losses, the Brazilian Central Bank recapitalized the bank. Recapitalization changes the company’s capital structure (for example, exchanging bonds for stock) in hopes of making the company more profitable. After Panamericano’s stock fell sharply when further accounting issues were discovered, it was sold to a larger bank. Brazil’s Central Bank insists that this was an isolated incident, but analysts worry that other banks are using the same accounting policies and may suffer the same fate.

While providing credit to the middle class has allowed for huge increases in growth, Brazil should learn from the mistakes made in other countries and carefully monitor the lending industry. However, some worry it may already be too late.

Discussion: Can Brazil learn from the crisis in the United States, or are the economies too different for comparison? Should there be international inquiry into Brazilian lending?

Brazil and China’s Trading Relationship Strained

FT: Brazil and China Trade Tensions Set to Rise

FT: Brazilian Factories Tested by Chinese Imports

Economy Watch: Foreign Direct Investment

As Brazil and China have increased trading and reciprocal investments, their relationship has gone from good to tense.

Part of the relationship between Brazil and China relies on foreign direct investment (“FDI”). FDI is any investment in an entity functioning outside of the of the investor’s country. For example, recently Sincopec, a Chinese oil company, purchased a 40 percent stake in Repsol Brazil. FDI is important to economic development in countries like Brazil because it brings more investment into the country. However, FDI can create a cycle of dependency—the more FDI that occurs in a country, the more dependent that country becomes on the foreign investors. This dependency is occurring in Brazil. Last year, China became the largest foreign direct investor in Brazil’s economy, the largest economy in Latin America. In 2009, China invested an estimated $300 million, and in 2010, China increased its investment to $17 billion, or about 35 percent of Brazil’s FDI inflows.

The Brazil-Chinese relationship also relies on trade activity. Brazil exports products such as iron ore and soy to China, and the volume of these exports has helped Brazil weather the 2008 financial crisis. Although this kind of trade would normally make for a positive relationship, new issues have surfaced that have caused tension between the two countries.

At the same time China has invested more in Brazil, it also has emerged as one of the biggest sources of cheap imports to Brazil. As the value of the Brazilian real has increased (making importing from foreign countries much cheaper), the domestic industry cannot compete with the lower prices of Chinese imports. Brazil also has extensive labor laws that drive up workers’ salaries by up to 100 percent, again reducing competitiveness of domestic products. By the end of last year, Brazil faced a manufactured good deficit of a record $23.5 billion. This means that Brazil imported $23.5 billion more in manufactured goods than it has produced domestically.

The influx of cheaper Chinese goods has caused a loss of manufacturing jobs in Brazil. In 2009, China surpassed the United States as Brazil’s largest trading partner, and trade between the two nations accounted for 12.5 percent of Brazil’s total exports. One group estimates this rise has cost Brazil 70,000 manufacturing jobs and $10 billion in lost income to local industry. Some Brazilian companies have even moved production to China and India where labor is cheaper.

These problems have prompted Brazil to consider restrictions on foreign direct investment in mining, as well as imposing minimum domestic supply quotas, which require a certain amount of goods to be produced within Brazil. The Brazilian government has increased import tariffs on toys and has begun anti-dumping campaigns on Chinese products. Brazil (still facing high inflation and interest rates) has also called upon China to revalue its currency.

Although the relationship between Brazil and China is changing, many believe that the Chinese imports are necessary to maintain the Brazilian economy. Current Brazilian industry cannot keep pace with the fast-growing consumer market, which has therefore become dependent on the supply of goods from China. The president of the Brazil-China Chamber of Trade and Industry said, “If you stopped all imports from China today, half the economy would grind to a halt, you couldn’t build any new buildings, you wouldn’t even be able to make a phone call.”

It is unclear where the relationship between Brazil and China is headed, but it is unlikely there will be a breakup anytime soon.

Discussion: Are the Chinese imports a “necessary evil,” or should Brazil only allow its consumer economy to grow as fast as its domestic production? What other actions can Brazil take to control Chinese imports? Should Brazil attract a more diversified investor base?

Brazil’s Government to Take Steps to Curb Appreciation of Currency

FT: Rousseff to tackle sharp rise in the real
FT: Brazil continues to wrestle with dilemma over interest rates
WSJ: Brazil Rates Are Focus as Inflation Edges Higher
Economist: Waging the currency war

The value of the real, Brazil’s currency, rose 4.6 percent in 2010 after a 34-percent gain against the dollar in 2009. Although the strength of the currency makes buying foreign products cheaper, the appreciation is being blamed for hindering Brazil’s manufacturing competiveness because it makes exports more expensive. While analysts expect a drop in the currency, they warn against expectations of a large decrease in its value against other currencies. Therefore, Brazil must act now to stop the appreciation in its currency.

Issues affecting Brazil’s currency are high interest rates, rising inflation, and high government spending. In the past, Brazil lowered its interest rate to 6 percent during the first term of President LuizInácio Lula da Silva. However, in his second term in 2008, government spending increased dramatically to fight the global financial crisis and continued throughout 2009, causing interest rates to rise. Another cause of the rising interest rates is the country’s low savings rate, a factor that keeps Brazil’s economy dependent on foreign capital.

Although Brazil is currently dependent on foreign investment, the government is taking steps to deter foreign capital inflows. Brazil introduced and then raised a tax on bonds bought by foreigners. While this strategy seems counterproductive, Brazil hopes to decrease the amount of foreign capital in its reserves, thereby decreasing the value of the real and encouraging its exports. Economists warn that this strategy is dangerous if the move discourages foreign investors completely. Instead, they suggest that the government rein in its spending to solve this problem.

Even though interest rates are a prominent issue, the central bank, with de facto autonomy from the government, continues to raise interest rates due to the high inflation and government spending. Analysts expect an increase from 10.75 percent to 11.25 percent after a two-day meeting that ended Wednesday. Although rate increases are normally an appropriate way to fight inflation, some policymakers argue that decreased government spending would be more beneficial. After the presidential election last year, the central bank published a study that found that most economists who had studied Brazil thought that trimming the government budget by one percentage point of GDP would have the same effect on inflation as increasing interest rates by one percentage point.

When she took office on January 1, 2011, Brazil’s president, DilmaRousseff, promised to make dealing with Brazil’s appreciating currency a priority of her administration. Although the government has taken some steps, neither she nor her administration has offered a concrete and long-term plan of how to decrease spending and by how much. Many critics fear that because the majority of her economic advisers came from the previous government, there will not be any real changes.

Although the government introduced capital controls to contain appreciation of the real, the measures will only have a temporary effect. Brazil’s finance minister (whom Rousseff appointed from the previous administration) says the government is decreasing interim budget spending by one third and is planning more cuts to fight appreciation. Many economists say real and lasting budget cuts are necessary.

Discussion Question: Should the Brazilian government address dangerous levels of foreign capital inflows by cutting government spending or by imposing capital controls?

After Boom Year Latin America Turns Thoughts to Bust

Sources:
BBC.com: Latin America Sees Uncertain 2011
Economist.com: So Near and Yet So Far
Economist.com: Waging the Currency War
FT.com: Risk of Bust After Boom Haunts Latin America
MercoPress.com: Lack of Rainfall in Argentina is Pushing up Prices for Corn and Soybeans

Latin America just finished one of its best economic years in history to wrap up one of its best economic decades in history. Nearly every country in the region experienced growth rates above 3% of GDP for the year, with Brazil and Peru setting the pace with near double digit growth rates. For the decade, every country experienced average annual GDP growth of between 1.8% (Mexico) and 5.6% (Cuba). Some observers have hailed the news as proof that Latin America has finally turned the page on its disastrous economic history. Recent news, however, suggests that Latin American leaders have not forgotten their history lessons just yet.

Latin America has historically suffered through the boom-bust cycles associated with commodity driven economies. No other region of the world has complained so much about its natural resources than Latin America, a region rich in precious metals, oil, and agricultural land. Because of that history, Latin American leaders are currently very aware of the fact that the high commodity prices prevalent today will not last forever and that they carry risks equal to their potential rewards. Many politicians and commentators are claiming that this is the year the world will find out if the region has developed truly mature economies.

The fear of the end of the boom began in the fall of last year with the talk of an impending currency war coming out of Brazil. Latin American countries began expressing concerns that appreciated currencies would spell doom for their exports, and thus drag down their entire economies. Since that time several countries in Latin America, including Brazil, Chile, and Peru, have moved to prevent their currencies from appreciating. This may actually be a good sign of economic maturity.

For example, Chile could easily sit back and do nothing while the price of copper remains at a record high (Chile is the world’s largest copper producer), but the appreciation of its currency that comes with the increased foreign investment in the mining industry has begun to negatively impact other industries, including the wine and agriculture industries whose products are less competitive on the global market with a higher currency. Though the idea seems fairly basic, these currency moves seem to show Latin America’s realization that a diversified economy is necessary for continued growth, and thus moves must be made to protect broad portions of the economy, not just the largest, often commodity-based, portion.

At the same time, the risk still exists that none of these measures or any other measure put in place over the last decade will work to prevent another period of economic bust. The region cannot prevent the poor weather that has lead to lower crop forecasts in Argentina and Brazil, (which generally provide the world’s soy and wheat crops during the North American winter) nor can it accurately predict when and if China, the country currently consuming all of Latin America’s commodities, will reduce its production levels and subsequent demand for Latin America’s resources. Only when uncontrollable and unexpected economic shocks occur will the world be able to accurately determine whether Latin America has moved away from its past, or if it is still stuck in the boom-bust cycle that has defined it to date.

Discussion:
1) How do Latin American countries’ moves to protect their currencies show economic maturity? How might they be examples of the region’s economic instability?
2) How should Latin American countries plan their economies considering the natural resource wealth and the boom-bust cycles that accompany commodities?

Police Take Back Favela in Rio

Sources:
Economist.com: Time's Up
Estadao.com.br: Bandidos fugiram do Alemão pelo esgoto e com uniformes do PAC, diz delegado
FT.com: Security Forces Win Control of Rio’s Favelas
Mercopress.com: Brazilian Forces Expel Criminal Gangs from Favels; Promise to Stay
NYTimes.com: Brazilian Forces Claim Victory in Gang Haven

After a week-long struggle, Brazilian police and military forces claimed victory in a fierce gun battle in the notorious Alemão favela (shantytown) in Rio de Janeiro (population 100,000). The battle was sparked by an uprising in the neighborhood by drug gangs on November 20. Brazilian officials have labeled the uprising as a response to the government’s “pacification” campaign. The campaign was started in 2008 as a strategy for making Rio’s streets safer before the 2014 World Cup and 2016 Olympics to be held in the city.

Brazil has had a long history of problems with both gangs and the favelas generally. It is estimated that up to one-third of Rio’s population of six million resides in a favela. These favelas usually lack basic services such as running water, electricity, and banking. They have been controlled by powerful drug cartels for decades. Brazilians have long complained of the problem while their politicians have ignored the problems, thanks to hefty bribes paid by the cartels.

Only because of the international concern raised in the wake of the announcements that Brazil would be hosting the World Cup and Olympics has political support swelled to a level sufficient to attack the problem. In 2008 the state and national government announced a new plan to place “police pacification units” (known by the Portuguese acronym UPP) in Rio’s favelas to establish a permanent police presence in those areas. Many were concerned that the program would fail because residents of the favelas have historically trusted the police even less than they trusted the drug lords. Their only contact with police officers was often in situations where police entered a slum to forcefully extract someone—situations that often caused collateral casualties.

The police and military victory on November 28 is proof that the pacification plan is indeed working. The government was able to seize 40 tons of marijuana, 150 kilos of cocaine, 50 assault rifles, 50 stolen motorbikes, and 9 antiaircraft guns while making around 200 arrests. Though there have been around 40 casualties, the reaction from favela residents to the operation has been positive. The overriding fear, however, is that the newfound peace will not last, even though the government promises that the police presence will remain permanently.

Discussion Questions:
1) To the casual observer this police tactic appears to be a top-down approach to solving a problem. How might a bottom-up approach better aid development and sustainable growth in the favelas while at the same time rooting out gangs?

Latin America Reacts to “Quantitative Easing 2”

Sources:
Estadao.com.br: Meirelles vê problemas em excesso de dólares e quer acordo no G-20
Elmercurio.com: Dólar cierra con su mayor caída en 16 meses y Wall Street marca máximo en dos años por la Fed
Lanacion.com.ar: La euforia en los mercados impulsa a la economía local
Mercopress.com: Emerging Economies Ready to Counter the Federal Reserve Latest Liquidity Injection
WSJ.com: Fed Fires $600 Billion Stimulus Shot

On Tuesday, November 2, the Federal Reserve (the Fed) announced a second round of quantitative easing, a process in which the Fed buys government bonds from banks in the hopes that the banks will use the money received to inject capital into the market by issuing new loans. The $600 billion plan has its supporters, but many—both in the U.S. and abroad—are concerned with the possible side effects of the program. The main concern in the U.S. is the possibility of inflation, but abroad the concern is the devaluation of the U.S. dollar. These are essentially two sides to the same coin.

If the value of the dollar falls, other countries’ exports become more expensive for consumers in the U.S. Theoretically this will reduce the total amount of imports the U.S will bring in from the rest of the world. The devaluation will also make U.S. products cheaper for foreign consumers to buy, which should increase the amount of exports leaving the U.S. This would be a boon for U.S. producers who would likely increase hiring to meet the increased production requirements of a higher global demand for their products. The flip side is that the rest of the world’s producers would see their exports fall—many global economies would suffer so that one large one could grow. This is not the guaranteed result of the new program, but it is the possible outcome Latin America fears the most.

Brazil has been one of the world’s most vocal critics of the policy, with the country’s finance minister saying the program’s real purpose is to drive down the value of the dollar so as to increase U.S. exports at the expense of the rest of the world (and not to free up credit in the U.S. as the Fed claims). He even went so far as to compare the program to throwing money out of helicopters. This anger comes from the fact that Brazil has spent the last several weeks trying to stop capital inflows which were putting upward pressures on its currency, the real. It fears that those efforts will have all gone to waste as the Fed’s new cash injection will simply redouble the U.S. foreign investment in emerging markets like Brazil, further pushing up the value of the real.

Other countries have shown more cautionary responses. Chile’s currency appreciated more than any currency in the world except for the Russian ruble in the days after the announcement. This surely makes Chile’s exports less attractive compared to the rest of the world, but the announcement also caused global commodity prices to rise, including the price of copper, Chile’s main export. These two phenomena may ultimately cancel each other out. Argentina likewise benefited from the announcement after the price of its two largest exports, grain and soy, rose dramatically.

These mixed reactions are a good example of the conundrum Latin America (and most of the developing world) faces because of the global economic downturn. The region exited the recession quickly and is now experiencing robust growth, but no one expects that growth to continue if the U.S. and European economies do not begin to grow more rapidly. At the same time, Latin America is concerned that those economic powers might turn to protectionist measures to spur internal growth while ignoring the consequences for the rest of the world.

Discussion:
1) How concerned should Latin America be about this new round of quantitative easing?
2) Should the U.S. concern itself with the economic fears of the rest of the world right now, or is now the time for the U.S. to help itself first and the rest of the world second?

Brazil Moves to Protect Currency

Sources:
Estadao.com.br: Fundo Soberano já pode comprar dólar
FT.com: Brazil Pressured for More Action on Strong Real
Mercopress.com: Brazil’s Central Bank Buys 5.9 Billion USD to Contain Revaluation of the Real
Reuters.com: Brazil’s Real Weakens on Cenbank Threat
WSJ.com: Government Threat Fails to Dent Enthusiasm for Brazil’s Real

Brazil’s government made a concrete decision to protect the value of its currency (the real) from further appreciation. The real has appreciated 100% since 2003, the year current President Luiz Inácio Lula da Silva took power, and 5% since the end of June 2010. This appreciation makes it cheaper for Brazilian companies and consumers to buy foreign imports, but more expensive for foreigners to purchase Brazilian exports, thus pushing those customers towards other cheaper markets and hurting Brazil’s bottom line. The government has warned that the real’s continued appreciation against the U.S. dollar threatens to derail its current economic growth.

The situation has been further affected by the announcement that the state-owned oil company, Petrobrás, will be making the world’s largest stock offering ever at $78 billion (R$134 billion) after discovering massive oil reserves offshore. Because priority will be given to purchasers in Brazil, foreign investors have flocked to the country, converting their U.S. dollars to Brazilian reais, thus increasing the supply of dollars in the country and increasing the value of the real. This trend should end after the sale, and the flow of dollars in and out of Brazil should return to a lower level.

The Brazilian government has authorized its own sovereign wealth fund to purchase dollars to ease the upward pressure on the currency. By law, those U.S. dollars cannot stay in Brazil so they will be invested in stocks overseas or deposited in foreign banks. The government has also increased the amount of dollars it purchases in daily currency auctions and increased the number of daily auctions to two from one normally to try to lower the value of the real.

The government is walking a fine line with its currency. If the government’s policies are too effective and the currency depreciates too much the country could face inflation, which would likely put the brakes on domestic spending and thus slow any growth driven by domestic consumption. A turn-around in the stagnating U.S. economy could ultimately be the best medicine for Brazil’s currency issues as the dollar would increase in value to maintain the current exchange rate even as the real increases in value.

Discussion:
1) How can currency adjustments be justified in an economic world controlled by the “invisible hand” of the free market?
2) The U.S. is currently upset with China because of its policy of keeping the yuan artificially low. How do you think that dispute might affect economic issues between the U.S. and Brazil, a country that—like China—has many industries that compete with U.S. industries (ethanol, cotton, and sugar are three good examples)?