BRAZIL'S HUGE OIL FIND WILL LEAD TO NEW WEALTH....OR A PETRO-POPULIST GIANT
No wonder that Brazil's president, Luiz Inácio Lula da Silva, proclaimed ''God is Brazilian'' after the discovery of massive oil reserves in his country earlier this month: The find could soon turn Brazil into a major oil exporter, and a big player in world affairs. But it could also threaten to derail Brazil's slow but steady march into a successful economy, and turn it into a petro-populist country...Read more about it here, and let us know what you think.
posted by Andres Oppenheimer at 9:00 AM
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Brazil's potential may be vast, but it has remained untapped potential for hundreds of years and it will likely remain a typical over-promise under-deliver story as found in its neighbors such as Bolivia and Venezuela.
Goldman Sachs got Brazil wrong as a long-term investment. They are merely betting on China keeping commodity prices high as if commodity-based economies could be considered long-term investments. However, the only constant in commodity prices is change, as they almost never prove to be a smart long-term growth story when you look at 15+ year time horizons. Brazil's economy has tied its fortune to its commodities in the past with great fanfare during high commodit prices.
Brazil's economy is still doing little else at this point.
One problem with Brazil's oil discovery will be Dutch disease. Whether or not Brazil pundits want to admit it, Brazil's new oil will come with a price and that will include a crowding out of investments in industry by the income and investments in oil through their effects of over-valuing the currency and making Brazilian exports less competitive.
Brazil may well become a wealthier nation, but it will be government-run money and not long-term organic growth created by its citizens' own businesses, skills, and employment. The optomists are either naive or have something to gain in denying the inevitable inefficiencies and corruption to be expected by a vast increase in government-controlled money and resources.
Nevertheless, there is certainly some hope for Brazil's modernization despite the temptation to become a lazy natural-resource economy without pressure to push reforms. For example, it can learn from the Chilean and Mexican models which have in the last two decades dealt with wildly changing commodity prices by taking measure to add stability to their economies and by increasingly reforming their economies to encourage other sectors of their economies besides their natural resource exploitation.
They have taken steps to encourage business and investments as well as exports and production.
Even before the Brazilian oil find, there were doubts expressed as to whether Lula would be content to ride out the rest of his term without instituting additional major reforms.
Now the oil find merely reinforces the expectations that Brazil will continue to repeat its promises to take its people and economy to a new place by revving up its motors, but then will instead tie its fortunes to commodity prices... again.
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