No emerging nation has attracted portfolio flows the way
Hotel rooms in Rio de Janeiro cost more than in the south of France. Restaurants in Sao Paulo are pricier than in Paris. Bellinis are cheaper in Venice. Apartments in the chic Leblon area of Rio sell for more than Fifth Avenue co-ops with views of
Little of that wealth is being spent on much-needed infrastructure.
Until recently, the Brazilian economy was one of the most amazing comeback stories of the past decade. After the country suffered through a period of hyperinflation and economic stagnation in the 1980s and '90s, its growth rate doubled in the past few years. But now
Government spending is not only too high, at 35% of the economy — compared with an average of 25% in other emerging markets — but also too soft. Most of it goes to generous pension and welfare schemes rather than to building roads or improving schools.
Foreign investors gloss over these shortcomings and focus on the stability
But any strength taken too far becomes a weakness. The commodity hype is drawing in too much foreign money, driving up the value of the real to a level that hurts other industries. Brazilians are spending a record amount on imports, so the current-account balance, which measures income from trade and services, is deep in the red. If commodity prices decline, then that hole becomes unmanageable.
All this makes