By Mario Osava
RIO DE JANEIRO, Feb 22 2006 (IPS)

Critics of Brazil’s monetary policy have added a new concept to their artillery: “Dutch disease”, or the threat of deindustrialisation of the national economy.

The effects are already reportedly affecting industries that generate many jobs, such as footwear and textiles, forcing factories to shut down in the face of competition from China and other nations in Asia. An overvalued real forced nearly 1,000 companies out of the export market last year and has slowed the growth of exports so far this year.

In Brazil, the phenomenon has been triggered by the rise in exports of minerals and farm products like soybeans, which have been bolstered by high international prices, say the analysts who are talking about “Dutch disease”.

Agribusiness accounted for nearly 86 percent of Brazil’s trade surplus last year, which amounted to a record 44.8 billion dollars.

“Dutch disease” was first observed in the Netherlands in the 1960s, when the country became a major exporter of natural gas and posted a bulky trade surplus. At the same time, the value of the local currency rose, making manufactured goods less competitive.

“This does not apply to Brazil,” which faces no risk of “deindustrialisation, or of returning to an agro-exporter past,” Guido Mántega, president of the state-owned National Bank for Economic and Social Development (BNDES), told IPS.

Mántega, a former planning minister and one of the leading economists in the leftist governing Workers Party (PT), argued that manufactured products comprise a majority of Brazil’s exports, and that “Brazilian industry has never been stronger,” with such a high degree of technology incorporated. In addition, he said, its share of the world market is growing.

The Brazilian car industry, for example, exported 33 percent more vehicles last year than in 2004, he noted.

The automotive industry was the sector that posted the highest level of growth in the past three years, with increases in output, productivity and job creation, he added.

Last year, it absorbed half of the total BNDES financing – the equivalent of 11 billion dollars – which goes towards investment aimed at bolstering productive capacity.

Minister of Development, Industry and Foreign Trade Luiz Fernando Furlán also said the “Dutch disease” theory did not apply to Brazil, observing the variety of export sectors, of which industrial products represent a large share, and the fact that no single commodity dominates the country’s exports.

But both officials admitted that the exchange rate overvaluation of the real is worrisome. The local currency has steadily gained in value against the dollar in the last three years, a tendency that will continue, according to analysts. The real, which stood at 3.9 to the dollar in mid-2002, now stands at around 2.15, having gained 16.7 percent last year.

This situation is beginning to affect exports, the minister acknowledged. In the first 17 days of February, Brazil’s exports grew by 4.1 percent as compared with the same period last year, marking a break in a lengthy period of strong, sustained expansion.. During the same time span, imports grew by 17.5 percent.

Economists are divided on the subject. Some have “diagnosed” the disease and maintain that the country has already suffered deindustrialisation as a consequence of an overvalued real.

Others insist that the difficulties faced by Brazil’s industrial sector are the result of overly high interest rates and taxes, combined with shortcomings in infrastructure and technology.

For his part, Fernando Cardim de Carvalho, a professor at the Federal University of Rio de Janeiro, believes that although the situation in Brazil differs from the experience of the Netherlands, the South American giant is in fact suffering the effects of currency overvaluation. But in Brazil’s case, “it is not the result of a naturally occurring phenomenon, but rather of a choice that has been made, and of deliberate policies.”

Cardim de Carvalho told IPS that the overvaluation of the national currency is not an inevitable consequence of the surplus of dollars brought about by exports of oil, gas and other products that have been recently discovered or for which world market prices or export volumes have rapidly risen.

Argentina and China have also experienced major growth in export revenues, but they have maintained exchange rates favourable to exports, and low interest rates, converting their trade surpluses into currency reserves, unlike Brazil, he said.

The problem with Brazil, he argued, is that with the high basic interest rates set by the Central Bank, it is too costly to expand reserves the way that China and other countries with large trade surpluses have done.

In addition, he added, high interest rates attract speculative capital, which further exacerbates the overvaluation of the real.

Furthermore, “Dutch disease” is not the only means by which currency overvaluation can damage national industry, stressed Cardim de Carvalho. He pointed to the recent example of Argentina, where parity between the peso and the dollar was maintained by law between 1991 and the economic collapse of 2001.

Brazil itself had already experienced something similar between 1995 and 1998, when its inflation-fighting policy was based on a strong local currency, aimed at stimulating imports to keep domestic prices down, and high interest rates that significantly increased the public debt.

Depending on agricultural or mineral exports is bad business, because world market prices for primary sector commodities are highly unstable, he warned. Brazil has experienced “boom and bust” situations in the past due to price fluctuations for sugar, coffee and rubber, which brought a brief period of prosperity to the Amazon region between the late 19th and early 20th centuries.

Excerpt: