Economy

Chile, once Latin America's economic model, now overtaken by Brazil

Conservative tycoon Sebastian Piñera won the second round of Chile's presidential election on Sunday in part due to voter faith that he can revive the economy. Meanwhile, Brazil's economy is booming.
By Sara Miller Llana Staff writer / January 17, 2010

Santiago, Chile; and Rio de Janeiro, Brazil

For two decades, Chile was the “teacher’s pet” of Latin America, the student who always brought home straight A’s. Economists gushed that the Andean country’s commitment to free-market policies and democratic reform made it a model for the developing world. And as Chileans enjoyed the trappings of a sustained average growth rate of more than 5 percent per year, poverty plummeted from 40 percent to 13.7 percent. But in the past year, Chile’s gold star has gone to its hulking neighbour to the east, Brazil.
The agricultural juggernaut just won its bid to host the 2014 World Cup and the 2016 Olympics; it discovered vast oil deposits that could turn it into a major oil exporter; it was one of the last countries to be pulled into the global economic crisis and one of the first to pull out.
To be sure, the so-called Chilean “miracle” that constructed the most solid economic foundation in Latin America still stands, and some of its slower growth today is merely a result of its own maturation. But Brazil is finally claiming new status in the region, and not just for its size.
“We always looked at Chile as something better than us,” says Arthur Ituassu, a professor of international relations at the Pontifícia Universidade Católica in Rio de Janeiro. “There is a growing sense in Brazil that we are now the major actor in South America.”
Promise finally fulfilled
This is not the first time that Brazil has been heralded as the world’s rising star. In the late 1960s and early ’70s, the country was growing at an average rate of 11 percent a year. But the oil shock of 1973 stifled that rise, and economic woes, conbined with political ones, characterized the 1980s and early ’90s. While Chile was experiencing its “golden decade,” Brazil struggled through its “lost” one.
Yet today, with more than a decade of stable institutions and sustained growth, Brazil is finally living up to its promise.
Foreign investment, for one, has poured in. Investors are drawn to everything from biofuels to soybeans. Between 1994 and 1998, Brazil attracted an average of $14 billion annually in foreign direct investment; in 2008 that figure skyrocketed to $45 billion, according to the United Nations’ Economic Commission on Latin America and the Caribbean, based in Santiago, Chile. By comparison, Chile brought in $16.7 billion in 2008.
Brazil’s economy is vulnerable, especially as its currency, the real, has surged against the dollar, threatening exports. But inflation is under control, foreign reserves have been built up, and it has diversified its commodities trade. The government has helped to break 19 million people out of poverty since President Luiz Inácio Lula da Silva took office in 2003. His government raised minimum wages, augmented a conditional cash-transfer program, and helped create some 8 million formal jobs. Today, at 7.5 percent, the unemployment rate is below precrisis levels.
Chile more open than Brazil
Chile remains an economic stalwart. It also pulled out of the economic crisis solidly, using the windfall from copper exports saved during boom times. It maintains a strict fiscal policy and its 21 trade deals with 57 nations reflect an economy that is much more open than that of Brazil. It consistently ranks as the least corrupt government in Latin America and will this month become the 31st member of the Organization for Economic Cooperation and Development (OECD), a group of top developed nations.
“I would say our image in the region is extremely positive,” says Juan Gabriel Valdés, the executive director of the government’s Chilean Image Foundation. “We know that we are observed and studied.”
Still, some in Chile are starting to grumble. While it averaged 8 percent growth from 1987-97, it now grows at about half that rate. Chile needs to regain its momentum, say critics, and work out kinks such as lost productivity and rigidity in labor laws.
“Chile is like a B student today. It is not bad, but it is not brilliant,” says Felipe Morandé, dean of the economics department at the University of Chile and an adviser to Sebastian Piñera, the right-leaning candidate who won the second round of presidential elections on Sunday. Mr. Morande says part of Mr. Piñera’s appeal is voter faith that he can revive the economy.
But Brazil now overshadows Chile, especially with Lula, its wildly popular leader whom President Obama called “the most popular politician on earth.” Ricardo Ffrench-Davis, an economist and former central bank official, says Brazil looks so good partly because it used to look so bad. “Two years ago, Brazil was growing much less than Chile,” he says.
Both countries face challenges ahead; both need to improve education and bridge divides between rich and poor. But their recovery from the economic crisis, as well as the strong rebounds in other nations such as Peru, bodes well for the future of the region, says Carlos Furche, head of trade in Chile’s government.
And those in Chile say they welcome the success of Brazil, which they view not as a rival but as a boon: A growing Brazil buoys everybody.
“The importance of Brazil’s emergence,” says Thomas Trebat, a Brazil expert at Columbia University in New York, “is that it shows you that growth can occur in Latin America in more places than just Chile.”

Source: http://www.csmonitor.com/World/Americas/2010/0117/Chile-once-Latin-America-s-economic-model-now-overtaken-by-Brazil



Brazil's Meirelles: Tame Inflation Promoting Growth, Income
January 14, 2010

Brazil's continued compliance with annual inflation targets will help promote sustained economic growth and improving income levels, central bank President Henrique Meirelles said Wednesday.

Meirelles made the comments after Brazil's IBGE statistics institute earlier in the day reported the country posted IPCA consumer price inflation of 4.31% in 2009, well below the government's official annual inflation target of 4.5%. It was the sixth consecutive year that the country has met the target.

"In this period, controlled inflation represented predictability for the economy, with a consequential increase in the level of investment, and permitted the doubling of average economic growth to around 5% annually," Meirelles said in a written statement. "The increased growth, with controlled inflation, created conditions for the increase in worker incomes and a vigorous increase in the level of employment."

Meirelles said that as a result of its efforts to maintain controlled inflation, the country was "beginning the second decade of the 21st century with international respect and with the prospect of sustained growth for a long period, which will be marked by a substantial reduction in social inequality."

Brazil posted IPCA inflation of 5.9% in 2008. That result, however, was within a 2 percentage point margin for variation from the 4.5% central target allowed under the country's inflation targeting rules.

Brazil's central bank cut the country's reference Selic interest rate by 5 percentage points in early 2009, but has held the rate unchanged at 8.75% annually since September.

According to the central bank's latest weekly market surveys, the monetary authority is seen raising the rate to 11% annually by the end of 2010. IPCA inflation is seen ending the year on target at 4.5%.

By: Gerald Jeffris
Source: The Wall Street Journal



Brazil Ends 2009 Largely Unscathed By Global Economic Crisis
January 06, 2010

While most economies were battered by the global economic crisis last year, Brazil emerged largely unscathed and, by some measures, set record highs.
Thanks to the resilience of its domestic market and steady foreign demand for its commodities, especially from China, Latin America's biggest economy shrank only around 0.2% last year, compared to an estimated 4% contraction in the European Union and 2.5% shrinkage in the U.S.
Market and government forecasts now see Brazil's 2010 gross domestic product growth returning to pre-crisis levels of 5% to 6.5%.
Brazil generated some impressive economic feats last year despite the financial crisis that began to rock markets in late 2008.
The stock market gained 83% last year, its best year since 2003, sustained in part by a record net inflow of 20.45 billion Brazilian reals ($11.8 billion) from foreign portfolio investors, according to a Bovespa stock exchange statement Tuesday.
Brazil's foreign reserves hit record levels, rising to $239 billion, or 15% more than in 2008. Reserves swelled thanks to daily government dollar spot market purchases, undertaken in a bid to stem the appreciation of the Brazilian real, which gained 34% against the dollar.
The real's appreciation was another--but mostly unwelcome--record in the currency's 16-year existence.
The center-left administration of President Luiz Inacio Lula da Silva proved sure-footed during the dark days of the global economic downturn. Government measures maintained employment and domestic demand, while inflation was comfortably kept in check below its 4.5% annual target.
Thanks to tax cuts, improved credit conditions amid an aggressive easing in monetary policy and the stability of spending power for middle- and low-income households, demand for consumer durables continued through the worst of the crisis.
Brazil's key automotive industry and its lengthy production chain, a major national employer, was the main beneficiary of the tax cuts and the easy credit policy. Domestic motor vehicle sales reached a record 3.1 million units last year, an 11% rise from the year before.
The volume of consumer credit expanded around 30% last year, with some 70% of vehicle sales financed.
The government-owned Brazilian Development Bank, or BNDES, helped boost credit, writing a record in low-cost loans of BRL137 billion, 49% more than in 2008.
The Selic base rate, meanwhile, reached an historic low of 8.75% last year.
Brazil is well-positioned to take advantage of the much hoped for global economic recovery. Brazilian stocks, for instance, are expected to make further gains in 2010, but much less than in 2009.
Alvaro Bandeira, director of Brazil's largest brokerage Agora Senior is predicting a 20% gain for the Ibovespa index in 2010 based on expectations of solid growth.
That's well below last year's return but still very impressive for an economy with almost pariah status two decades ago.

By John Kolodziejski and Rogerio Jelmayer
Source: Dow Jones Newswires