Thursday, March 11, 2010

Why Is Socialist Brazil the Darling of Foreign Investors?

The explanation is very simple: seven years of astonishingly high rates of return on each dollar invested, as shown in my latest OrdemLivre.org article (in Portuguese).

The graph below illustrates my point. It compares yearly rates of return in dollar for investments in Brazil paying the Selic rate, the Brazilian equivalent of the fed funds rate (which is also shown on the graph as benchmark), during the previous social democratic administration (1996-2002) and during the current socialist administration of President Lula da Silva (2003-2009).

Rates of return obtained by foreign investors were indeed very high since macroeconomic stabilization in 1994. However, they are even higher during Lula da Silva's socialist administration (an accumulated rate of 451% in seven years!). This is more shocking when considered that those were years of extremely high dollar liquidity, with the lowest possible interest rates observed in most countries.

These incredible rates of return were driven by a combination of high domestic interest rates and continuous appreciation of the Brazilian currency. Given that these rates aren't sustainable, I wonder if the investors' infatuation with Brazil isn't about to end.

The Brazilian rates of return in dollar also offer new puzzles for academic economists to struggle with. In particular, economists need to address the highly unstable behavior of the exchange rate and the high cost of stabilization under the Brazilian inflation targeting regime.

The Marxist and socialist politicians now in government in Brazil are the same ones that passed the last few decades criticizing previous administrations for being overly generous to "greedy international capitalism." Isn't it the greatest irony that they ended up being the ones to throw the most amazing financial carnival party, solely for the enjoyment of those "greedy foreigners"?

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