We have been mercifully immune to these problems in Brazil. The steady hand on the tiller of economic affairs that has enabled Brazil to impose a stronger set of controls on the banking and exchange rate system up to now has returned Brazil to positive economic growth and lower unemployment. However, as I've indicated elsewhere, this positive state of affairs has been based on a grand compromise that has seen the overtly socialist PT (Labor Party) of President Lula embrace the inflation and interest rate control policies of his predecessor, Fernando Henrique Cardoso, by maintaining high primary budget surpluses and interest rates in order to keep inflation in check and enable economic growth.
However, in the run-up to next year's presidential elections, this compromise is showing its age and beginning to come apart.
In his drive to elect his chosen successor and establish his place in history, President Lula is increasingly trying to establish a virtual socialist government. He is expanding government hiring almost without control. One has to wonder what all these new public servants will be doing other than being grateful to the PT for their high salaries (public jobs pay higher in most categories than private sector jobs), lifetime tenures and full pensions. He is even attempting, with some success, to extend the grasp of his appointments into companies, such as the mining giant Vale de Rio Doce, by threatening to reintegrate them as state owned companies if they don't follow the government's directions on hiring.
Who is going to pay for all this public employment is obvious.
However, the largest concern is that with his focus on the election, he leaves his government increasingly open to the strivings of the "desenvolvimentista" group in and out of government. This set of politicians and academics wants the government to lower interest rates more rapidly and open the credit markets more substantially in a set policies that more recalls the supply-side credo of Reagan Republicans than any reasonably socialist economic policy.
Credit markets in Brazil are already a point of serious concern as housing, automobiles and appliances are being offered with ridiculously long terms according to Brazilian standards. 60 months to pay for a car means that the loan will not be paid off before the car is junk (If you know the streets and roads of Brazil, you will know what I'm referring to.)
If there is another hiccup in international markets that affects employment here, what will happen to all these loans? The thought scares many.
In my next post, I will put some numbers on these concerns to move them beyond the normal level of blog alarmism.
