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Brazil's Economic Nightmare

Walter Russell Mead

Brazil’s budget deficit much more alarming than thought. The Financial Times:

Brazil’s new government urgently needs to defuse fiscal “time bombs” that are set to blow up the country’s already strained budget, according to Arminio Fraga, the former central bank governor and founding partner of Gávea Investimentos, one of the country’s biggest hedge funds.

The administration of interim president Michel Temer would have to reverse a planned increase in spending on education as well as growth in the pension system that together are set to add up to 12 percentage points of gross domestic product to the budget in the next decade.

“If you do the arithmetic, it’s explosive,” said Mr Fraga at a conference in New York.

Not that the news is all bad. Brazil remains a rich country in terms of both natural and human resources, and the gradual strengthening of democratic institutions and the rule of law perhaps augurs well for the future.

But the country faces a genuinely wrenching adjustment in the immediate term. The experiment with leftwing rule began reasonably well under Lula and had some genuine social accomplishments to show for itself. But Brazil has missed another historic opportunity, squandering the income from the China-driven commodity boom instead of taking advantage of the good years to build a more solid foundation for the future. Now the consequences are coming due: a less supportive external environment and the consequences of mismanagement, corruption and poor strategic decisions will take a heavy toll.

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