Three cheers for Brazil's Central Bank

Joseph E. Stiglitz, 2001 Nobel Prize, Laureate in Economics, Project Syndicate

World markets seem to be turning up their nose at Brazil right now. They may be as mistaken about Brazil as world football experts were earlier this summer. When the World Cup began, the Brazilian team was deemed talented but flawed. Yet somehow Brazil again became the World Cup champion. The country, too, may prove equally surprising and resilient.

Indeed, in recent years, Brazil has created a vibrant democracy with a strong economy. It deserves a vote of confidence from investors and political leaders alike.

As in any vibrant democracy, differences in views exist. Not all Americans are enthused about President Bush's rapid conversion of trillion dollar surpluses into deficits, nor does a majority embrace his proposals to privatize America's social security system, which has done so much to eliminate poverty among America's elderly.

On key issues within Brazil, however, a broad political consensus (not unanimity, but no one should expect that!) exists, and this includes all the major contenders in Brazil's forthcoming presidential election in October.

There is a consensus, for instance, on sound fiscal and monetary policies: No one wants to return to the hyperinflation of earlier decades. Brazil's monetary policy has been managed extraordinarily well by Arminio Fraga (my former student), but behind him is a strong institution, with the analytic capacities of a first world Central Bank.

The initiative that Brazil's Central Bank made to increase transparency and openness are a model for central banks throughout the world in the developed world as well as the less developed. To be sure, there may be disagreements about fine- tuning the economy, but such are routine in any democracy.

There is also a broad consensus that while markets are at the center of a successful economy, there is an important role for government. Brazil's government, for instance, pushed one of the most successful telecom privatization, but also pushed for stronger competition and regulatory policies.

Unlike America, when the country faced an electricity crisis, it didn't blithely sit by, saying let market forces (which in the U.S., meant market manipulation by Enron and others) handle the matter; rather, the government came in with strong actions. As an American, I looked on in envy as Brazil managed its way through a difficult situation.

Brazil is a country of extraordinary human and physical resources. It may be called an emerging market, but it has first rate financial, educational and research institutions. Discussions about economics in Sao Paulo are as sophisticated as in New York. University seminars in Rio are as lively as those in Cambridge, Mass or Cambridge UK.

It produces one of the finest airplanes in the world so good that competitors in the more advanced industrial countries have tried to impose trade barriers. But Brazil, for all of its strengths, has one critical weakness: A high level of inequality. It is a weakness that (unlike in America) also carries a broad consensus: most agree that it needs to be addressed, and that government has the obligation to do so.

The current government has made extraordinary strides in education. Ten yeas ago, 20 percent of Brazil's school age children were not attending school; now that number is down to 3 percent. Whoever wins the election almost certainly will continue to make further investments in education.

Similarly, landless peasants are both an economic and a social problem, and the current administration has taken on vested interests to push forward on an exciting market-based land reform, one which has received support from the World Bank. Whoever wins the election will in all likelihood pursue a strong land reform program.

With the AIDS epidemic, Brazil faces challenges to its health system, and while one may agree or disagree with the particular approaches taken by the Brazilian government, this much is clear: everyone recognizes that this is a major responsibility of government. Moreover, whoever wins the election almost surely will reflect that broad national consensus.

Brazil's debt to GDP ratio is moderate better than in the U.S. at the time Bill Clinton became president, far better than that of Japan and several European countries. Unlike its neighbor to the south (prior to Argentina's crisis), Brazil has a flexible exchange rate system: Its currency is not overvalued if anything, it is undervalued. With strong exports, it should have no problem meeting its debt obligations, so long as interest rates do not soar to levels that turn a problem into a self-fulfilling prophecy.

Brazil has carved out a path that is not based on ideology or over-simplistic economics. It seizes opportunities while confronting and dealing with harsh realities, whether these are lack of education, landlessness, or AIDS.

By successfully charting its own course, Brazil has created a broad domestic consensus behind a balanced, democratic, market economy. Brazil's victory in the World Cup may have no connection with these reforms, but the creativity of that winning team does say a great deal about the spirit of the country.