Brazil, reality and the lessons from adjustment

During the heterodox conference, to which I alluded to in my last post, somebody (cannot remember for sure now; too many talks) suggested that in the middle of the current crisis Argentina and Brazil were islands of growth. This has been a common proposition in the international press, but one that is not founded on fact. The performance of Brazil under the Workers' Party administration (from 2003 onwards), while better than the previous one, has been far from stellar. The figure shows that average growth during the Cardoso administration was around 2.3%, and increased to 3.9% in the Lula-Dilma period.

By the way, last year Brazil decided to promote a fiscal adjustment to keep inflation in line, and also as an informal agreement between the Treasury (Dilma) and the Central Bank (Tombini) to reduce the rate of interest. If they expected the same effects as in the United States in the 1990s (when Clinton agreed to reduce spending in exchange for lower interest rates from Greenspan), then they forgot that in the US the private sector spending expansion associated to indebtedness and the dot-com bubble allowed for growth. In Brazil, in the absence of any other source of demand, growth collapsed to 2.7% last year! Another cautionary tale for those that think that fiscal adjustment is a panacea.