The famous phrase, “there’s no such thing as a free lunch” coined by the no less famous economist Milton Friedman, is probably the most direct and undoubted synthesis of the economic process or theory: today’s lunch comes from yesterday’s sweat and hard work. The current economic situation, Brazilian and worldwide, is the consequence of actions and planning of the past; a recent past, but also a more distant past. Effective actions in the past are the seeds for an abundant and tasteful meal in the present. On the other hand, bad and inefficient actions in the present will lead certainly to a scarce and less tasteful meal in the future. In this context, a leading Brazilian economist, Dionísio Carneiro, warned on the temptation of relaxing in our present planning actions and efforts, thanks to a myopic attitude regarding the economic boom of recent years: When surfing on a breaking wave, all our bad tendencies disappear, but at the end of it, on the turbulence of splashing water, the only ones to come out safe are those with good physical conditions, or better, good economic conditions.
The world economic boom experimented in the last decade is a consequence of many factors. First of all, it is related to productivity gains due to the IT revolution in the telecommunications field, internet, cell phones, and others. This revolution improved efficiency substantially within and amongst businesses. In Brazil, the former industrialization process by import substitution has granted Brazil with a wide range of technological options. Indeed the world boom is mostly due to higher growth in China than in Brazil. This Asian tiger grew for many reasons that are beyond this blog. The current economic boom, which seems to be ending, is also a by-product of a less prudent behavior of the American consumers. Indeed, the coming recession was prevented in the 1999-2001 dot com downturn. As Ken Rogoff said the actions taken by Greenspan were the best thing that money could have ever afford to buy. The fact that American consumers usually have more than one credit card and sometimes using them to pay their mortgages is a somehow a problem. The situation gets even worst when the commercial banks grant credits without previous background check to find out the person’s creditworthiness. Unfortunately, 2007 will be remembered as the year that consumers will be charged for their excessive (and unpaid) consumption. As of now, Americans will be affected by the recession. This in turn, might affect their credit, especially if they are homeowners. All in all, it seems that the period of a strong dollar is coming to an end. The impact of the weak dollar and a possible US recession in Brazil could reflect more intensely on the trade balance and the capital account. On the trade side, we expect a decrease in the trade balance for 2008 at $28 bn from $39bn in 2007. The current account transactions should post a surplus of about US$ 3 billions in 2007. However, in 2008 it is possible to achieve a deficit of US$ 9 billions (according to our projections). In turn, lower net exports leads to a decrease in domestic production and tax revenues. As we do not foresee any cuts in public spending, it is possible to observe a decrease in the primary surplus in the next three years. In turn, it will be even harder to reduce nominal deficit. It may be in this tighter scenario that Brazil will be more pressed to discuss and succefully implement the more urgent reforms: fiscal, labor and pension reform. Since the prosperity wave has not yet disappeared, this scenario may seem unrealistic, imaginary and possibly distant. Let us hope so! In any case, it is useful to think forward and act backwards such that we are not caught with unforeseeable (and unpleasant) surprises.