Making sure Brazil doesn’t go Dutch

I have written quite a few posts on the dreaded ‘Dutch Disease’ and one has to wonder about the Brazilian economy and its remarkable offshore oil bonanza.

Since 1960’s Holland’s sudden gas wealth pushed up its currency and crippled its manufacturing sector, economists have been wary of easy money, even coining a term – Dutch Disease – for its impact on the rest of the economy.

By 2020 it is expected that Brazil will be producing 5 million barrels of oil a day which takes it into the top 5 oil producers in the world. However the big question is will it succumb, like so many before it, to a lack of investment in other areas of the economy so that when the oil runs out they have other sectors that can contribute to growth.

In order to avoid a Dutch Disease scenario it is imperative that Brazil looks to improve on its productivity of the rest of the economy. According to The Economist it aims to invest in education, culture, science and technology, environmental sustainability and poverty eradication. This seems to be a rather ambitious list of goals, but as with Norway such spending could be worthwhile provided clear targets were set and the money was professionally managed. One of the key areas that needs to be developed is infrastructure for non-oil exporters – upgrades of roads and port facilities. However the sovereign fund, which has been instrumental in the Norwegian success story, might not have sufficient funds to invest even with the oil bonanza. The coastal states of Brazil have in the past received most of the royalties from offshore oil but now the Federal Government want an increasing share. With the Federal share shrinking there will less strategic investment as most of the funds will go into current spending. One wonders about the colour of the overalls worn by President Lula Da Silva and his associates in the picture above – is this a bad omen?

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