In an article today about President Lula Da Silva�s landslide (61-39) re-election victory, the Financial Times reports that the �the PT�s [Lula�s Workers Party] anti-liberal rhetoric during the second round has caused consternation among many economists, who see it as a sign that spending cuts, needed to release money for investment and growth, are less likely under a second Lula administration than the first.� This continues a major theme of the Financial Times� pre-election coverage. A bigger worry for economists concerned about Brazil�s sluggish growth (1.4 percent average annual per capita for Lula�s four years, about the same as for his predecessor Fernando Henrique Cardoso�s 1.6 percent for 8 years) would be Brazil�s interest rates. The Selic (central bank overnight rate, comparable to our Fed�s 5.25 percent federal funds rate) rate is currently at 13.75 percent. Brazil�s inflation is now less than ours; hence the country�s real interest rates are among the highest in the world. These exorbitant interest rates also contribute to the overvaluation of Brazil�s currency, which has appreciated about 54 percent during Lula�s first term, and makes it difficult for Brazil�s industrial sector to compete at home or abroad. (For more detail click here). In fact, for those economists worried about cutting the Brazilian government�s spending, lowering interest rates may be the fastest and most politically feasible means to that end: the government currently spends an enormous 7.9 percent of GDP for interest payments on the public debt (the equivalent of more than $1 trillion a year in the United States), and 47 percent of the debt has its interest rate tied to the central bank�s Selic rate. It is encouraging that the international press is finally beginning to notice the unprecedented long-term growth failure that is Brazil�s most important economic problem: over the last 25 years it has grown only 11 percent per capita, as compared to 123 percent from just 1960-1980. But it�s not likely that continuing the same economic policies of the last 25 years, along with some budget cuts, will reverse this failure.
--Mark Weisbrot
