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Brazil Belligerent as Global Crisis Makes Impact
Sept. 23, 2011

Published by Minyanville

Brazilian President Dilma Rousseff this week gave the opening speech at the United Nations General Assembly in New York. She was the first woman to do so and will be hoping that her raised global status will quell fears back home of a political immaturity, peddled by many critics especially in the wake of a spate of government resignations.

Rousseff has been keen to “intensify” relations with the United States since she came to power in January. President Barack Obama visited Brazil in March (see Obama's Brazilian Job), however, the trip was not seen as particularly successful as Brazil looks firmly towards China. There are also a number of rifts that remain open between Brazil and the US, including the former’s support of Iran’s nuclear program, US tariffs on Brazilian sugar and ethanol and a lack of firm US support for Brazil’s bid for a permanent seat on the five-member UN Security Council.

“The world needs a Security Council that reflects contemporary realities: a council that brings in new permanent and nonpermanent members, especially developing countries,” Rousseff said. She added that the global crisis was “too serious” to be managed solely by a “small group of countries,” alluding to the G7. The president also repeated Brazil’s recognition of a Palestinian state within the 1967 borders as well as supported UN membership for Palestinian leaders -- which the US has said it will veto.

It seems that Brazil’s biggest concern -- and gripe with the world economies -- is its volatile currency, which has dropped 17% against the US dollar this month, thanks to trouble abroad. Officials are concerned about the impact of the falling impact of the real on inflation, according to a member of the government’s economic team speaking to Reuters.

In an opinion piece in the Financial Times, Rousseff reiterated her disappointment with developed countries’ lack of a “sense of the collective good,” insisting that she would fight back against those who are manipulating currencies.

“With growth still weak, [advanced economies] have been adopting extremely expansionary monetary policies, rather than a more balanced mix of monetary and fiscal stimulus,” Rousseff wrote. “They are resorting to undervalued exchange rates to ensure their share of global markets. This wave of unilateral, competitive devaluations creates a vicious cycle that leads to trade and exchange rate protectionism. This has devastating effects for all but especially for developing countries.”

To overcome the global crisis, wrote Rousseff, developed economies need to co-ordinate and combat protectionism. “It is vital -- for Europe in particular -- that they regain the spirit of co-operation and solidarity shown at the height of the crisis.”

The Central Bank’s interest rate cut to 12% is also being seen as premature. Prices have continued to rise, worrying many that Brazil is not committed to the fight against staggering inflation.

Brazil would like the World Trade Organization (WTO) to be given powers to act against countries that have devalued their currencies in order to make exports more competitive. Brazil’s own exports are struggling, hitting its manufacturing industry hard. Authorities in Brazil blame developed economies’ loose monetary policies, designed to boost their own exports.

Brazil appears to be attempting to carve its own path through the global financial crisis, breaking even with fellow emerging markets with the recent interest rate cut. Analysts are skeptical of Brazil’s brazen outbursts. “Brazil’s presence on the world stage has swelled enormously in the past few years. So has its opportunity to take a leading role in world affairs,” wrote Jonathan Wheatley this week. “To squander that opportunity on hare-brained schemes with no chance of success seems wasteful to say the least.”

The global volatility has also hit unemployment which was at 6% in August, a record low for the month. The low figure will feed inflation as companies are forced to pay higher salaries to attract and keep staff. The additional cost ends up with the consumer.

“Brazil is running the risk of exporting employment,” Finance Minister Guido Mantega said. Brazil is therefore protecting its own industry, increasing taxes on foreign-built cars, notably from South Korea and China. The tax will rise from between 78% and 25%, depending on engine size, to up to 55%.

Mantega warned in January that the “currency war” could turn into a “trade war” and those thoughts were echoed by Rousseff at the UN and her many interviews this past week.




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© Girish Gupta