This is the subject of my latest Bloomberg columnHere is an excerpt, starting with the reality of Brazilian hyperinflation in the early 1990s:
Fortunately, economists and other reformers came to the rescue and devised an effective plan for monetary stabilization. First, Brazil created a virtual currency, called the URV, and changed contracts and prices according to the new unit of account. Then, a new currency, the real, was introduced, whose value is equal to the URV and roughly equal to the U.S. dollar. This opened the prospect of a new, more stable currency.
The crucial element of the reforms was a credible plan for fiscal stability. Brazil was not suffering from hyperinflation for no reason: the newly printed money was needed to meet the spending promises of the government. To make the numbers consistent without hyperinflation, the Brazilian government made budget cuts, privatized some assets, transferred some functions to state and local governments, and made constitutional and legislative commitments to a balanced budget…
But the end of this story is not entirely happy. For several years, the Brazilian economy has been growing below 1%, although it has recently Brazil has surpassed 2%. The country has abundant natural resources, abundant talent, excellent companies and universities, and no natural geopolitical enemies. Yet its economic growth has been mediocre. Brazil should be able to achieve annual growth of 4 to 6%.
The causes of this disappointing growth are varied and controversial. Possible culprits include corruption, excessive protectionism, an economy overly dependent on natural resources, an unreliable education system, and, perhaps, a loss of economic dynamism. During the glory years of the late 1960s and early 1970s, Brazil enjoyed very high growth rates, reaching 14 percent in 1973, suggesting that it could perform very well.
This is worth thinking about.
