| Succeeding Too Well |
12 May 2003
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Brazil's Currency Too Strong?
Pity Brazilian President Luiz Inacio Lula da Silva. Brazil's currency, the Real, is strengthening as capital flows into the country as foreigners invest in the economy there. Such capital flows are a sign of economic health, but the Real's rise may be too fast, which would undo the progress made on the external accounts. President Lula has suggested intervention in the currency markets to stop this. He should not -- not because it isn't the right policy, but rather because it won't work.
Those in the business will recall that George Soros made a billion dollars or so many years ago, when he put made a hefty bet that the British government could not afford to keep the pound tied to the D-Mark as it was. Interest rates, not intervention, was the only approach that worked. Brazil is not anywhere near Britain's league in the currency game.
Intervention will only serve to enrich speculators while draining the country of foreign exchange. If capital inflows need to be slowed, interest rates must fall. If that will have unwelcome effects on the local economy, then bureaucracy needs to step forward. Investing in Brazil must become a pain in the neck. The country must become less attractive for foreign investors, and red tape achieves that.
Rarely does bureaucracy for its own sake make sense, but in this case, it is in defense of an economy that is improved and of a government that is trying to reform local institutions. It might be worth the gamble.