Henrique de Campos Meirelles, president of the Central Bank of Brazil, described Brazil’s past economic struggles but argued that the Brazilian economy is strong and will continue to grow in a speech Monday in Gaston Hall.

Meirelles cited the Brazilian trade surplus as the main indicator of the strength of the nation’s economy. In the past when Brazil experienced growth, he said, the country would also experience a high trade deficit.

“Brazil is now more resilient against external shocks,” Meirelles said.

Meirelles said that Brazil is experiencing a sizable trade surplus and maintains a surplus with every country that it trades with. He also claimed that Brazilian companies are confident in investing in overseas trade today because of sound fiscal policies.

The fight against inflation was not a high priority before eirelles came to the Central Bank of Brazil, he said.

Meirelles also asserted that many in the banking sector at the time did not fully understand the devastation that inflation can cause in an economy.

After Meirelles’ appointment to the Central Bank’s presidency his first priority was to establish the bank’s credibility in financial markets, he said. The governors of the Central Bank set a target inflation rate of 8 percent – half the rate of 16 percent at the time – and kept raising interest rates to meet that target.

As soon as the bank was able to gain credibility, Meirelles said, it could effectively produce results from interest rate changes. The bank was soon able to reduce interest rates and spur economic growth.

“With more credibility comes more predictability,” he said, proposing that this predictability is precisely what financial markets desire.

Currently, projected growth in Brazil’s GDP is 4.4 percent, and the inflation rate stands at 4.5 percent.

Meirelles cited fiscal and monetary irresponsibility by the government as the main cause of the high inflation and stagnant growth in Brazil over the past few decades.

In the century between 1880 and 1980, Brazil experienced a level of growth second only to Japan. Between 1990 and 2003, Brazil grew at a healthy level of 1.8 percent, but inflation during that same period averaged 161 percent.

While Meirelles blamed inflation as the main culprit behind Brazil’s economic troubles, he also outlined education, productivity, savings and investment as other determinants of growth.

In the 1970s, the Brazilian government borrowed heavily from international markets in order to sustain its high level of government spending. Meirelles claimed the world became weary of Brazil’s inability to repay its debt and soon the interest payments became unbearable.

“The rich take advantage of higher rates of government spending,” Meirelles said. He said the focus of the government, however, needed to be on reducing government spending in order to lower the interest rate and promote sustainable economic growth. Too much government spending limits the resources available to the private sector and creates a crowding-out effect that limits growth potential, he said.

According to Meirelles, Brazil is now seeing the benefits of sound economic policy in the form of higher tax revenue, higher consumer confidence and more jobs.

“This country now means business,” he said.

Meirelles drew a parallel between the budget and trade deficits in the United States and those experienced by Brazil at the end of the 20th century. He said that the United States can run a deficit because it assumes that the gains from financing will exceed the future interest payments.

Despite the bright outlook described by Meirelles, many in the audience had concerns over when the people of Brazil will begin to see the benefits of a strong economy.

Meirelles answered questions regarding low minimum wages and declining purchasing power for the middle class. He stressed that the most important priority for the government is to create jobs.

“Brazil is poor yet,” Meirelles said. “It doesn’t get rich overnight.”

Meirelles also praised Brazilian President Luis Inacio “Lula” da Silva for balancing progressive social policy with fiscal responsibility.

Have a reaction to this article? Write a letter to the editor.

Comments are closed.