Robert Shiller: "Brazilians Might Be Rationally Exuberant"

Robert Shiller says Brazil's "combination of philosophical radicalism and economic pragmatism has proven to be a perfect formula" for economic progress:

Radicalism and pragmatism at work in Brazil, by Robert Shiller, Project Syndicate: Brazil's stock market, as measured by the inflation-corrected Bovespa index, has more than quadrupled in value since President Luis Inacio Lula da Silva's first election victory in October 2002...

In comparison, the inflation-corrected Shanghai Composite only doubled during this period, while the US market, as measured by the inflation-corrected Standard and Poor's 500, increased only 50 percent. Indeed, the US has never experienced a fourfold increase in stock prices in less than five years...

Given that Lula is an avowed leftist who counts Venezuelan President Hugo Chavez and Cuban President Fidel Castro among his friends, Brazil's performance is all the more surprising.

How could he manage to preside over such a spectacular stock-market boom? Are Brazilians too exuberant? Might it be time for foreign investors to pull their money out?

Stock-market movements are certainly hard to explain, but there are reasons to believe that Brazilians might be rationally exuberant. Corporate earnings in Brazil have gone up roughly as fast as stock prices. With the price/earnings ratio remaining stable and moderate, the stock-market boom does not appear to reflect mere investor psychology. ...

Lula has called this a "magic moment" for the Brazilian economy.

While such words merit caution, economy fundamentals bear them out. The currency, the real, has been strengthening steadily...

Inflation and interest rates are falling, the country is running with a trade surplus, foreign investment is flowing in at a high rate, and the government has more than paid off its debts to foreigners, becoming a net creditor to the rest of the world.

So stock investors seem to be recognizing Brazil's economic vitality... Nevertheless, given corruption scandals involving prominent government figures that have come to light over the past few years, it is natural to wonder why the stock market has remained so strong.

Why haven't the stories of corruption caused a crisis, as similar scandals in South Korea and Malaysia did during the Asian financial crisis of 1997? Indeed, while the scandals have shaken the government, Lula was reelected last year, and investors continue to pour money into the stock market.

One reason is that the scandals have provided an opportunity for investors to see Brazilian freedom of speech and democracy in action. Newspapers and television commentators have been relentless in reporting the scandals, helping to prove to Brazilians and foreign investors alike that the political system is sufficiently stable to withstand open criticism.

Lula remains popular with Brazilians because his populist rhetoric shows real sympathy with the less affluent, and with foreign investors because he has always tempered his radicalism to accommodate economic reality.

He recently criticized Bolivian President Evo Morales' threats to seize foreign assets for his failure in this regard.

"Radicalism is incompatible with the common sense needed from someone who governs," Lulu said.

That combination of philosophical radicalism and economic pragmatism has proven to be a perfect formula for Brazil's progress. Granted, the future is unknown... But, for me, the story is ... convincing...

Here's another view:

Brazil tries to seize economic momentum. BBC: ...[U]nlike China or India, Brazil's current growth rate is not being sustained by rapid industrialisation or domestic demand, but by the high prices the rest of the world is willing to pay for its commodities and raw materials.

When that demand falters or prices fall, Brazil may well find it has missed a golden opportunity for rapid economic development.

And, since Brazil is not my specialty (help?), I'll just add this from Reuters and leave it at that:

Brazil's Lula says low inflation as vital as growth, Reuters: Brazil is committed to responsible economic policies and low inflation is vital, President Luiz Inacio Lula da Silva said on Monday.

"We're not going to play around with the economy," Lula said on state radio.

"Obviously we could be growing more ... but distributing income and controlling inflation are just as important."

Lula also said he expected growth to pick up in the second half of the year. ...

Lula, who followed a market-friendly economic policy on his first term despite his leftist background, said he would do everything necessary to make sure Brazil's economy kept gaining credibility. Stability was the best thing for the working class, he said.

"Controlled inflation represents an extraordinary gain for salaried workers," he said in his regular radio address.

In recent months Lula has pledged to increase government investment...

"All the world can see that we have managed to combine growth with inflation control," Lula said.

Brazil's risk rating reached new lows as strong exports and a weak dollar lifted the currency, the real, to levels not seen in years.

"Brazil is living its best moments since the Republic was proclaimed. I have no hesitation in saying this," Lula said.