Tom Walker asked me what was going on in Brazil, since I'd just visited and talked with many economists. Thought this might be of more general interest. Wrote Tom: >My impression from just looking at the newswire numbers was that the focus >of the storm was shifting to Brazil. What does it look like on the ground there? > Absolutely, they have the feeling of being beseiged. The global financial crisis is the ONLY story in Brazil now. Their BOVESPA index has lost over 40% in the past month. The Cardoso regime is in a real pickle. Elections are coming in October -- I think about the middle of the month. Fernando Enrique (as the Brazilians call him) is far ahead of Lula and other competition -- the crisis is not changing that calculus. But Cardoso is committed to the Real/$ peg, and thus must avoid actions that rock the boat at all. The markets are focusing on Brazil's 7.5%-of-GDP federal deficit, as an excuse to hammer the SP markets. But the budget is balanced in terms of expenditure; the deficit is due to the legacy of overseas borrowing. An interview in Sunday's Jornal do Brasil with M.Claire Pastore, the former Bank-of-Brazil head, was amazingly frank. He said, the 7% of GDP deficit can maybe be reduced to 3% in four years, but only if growth continues. The govt has projected 4% growth, but 2% would be a blessing at this point. Pastore went on to say, in response to a reporter's question, absolutely we are in recession -- this is, going into the possible meltdown phase of the crisis. UE, eg, is 20% officially. Brazil is well positioned now to exploit export possibilities, but there are essentially none out there. The exchange-balance math is, $40 bn trade deficit, offset by about $20 bn in capital inflows from privatizations (which have been controversial). There are about $55 bn in reserves remaining, as a guess. So either they have to find another $20 bn to balance the accounts, or lose more reserves. Yesterday's WSJ had a feature on Cardoso -- his plan is to attract more capital inflows by holding the line and privatizing more. Banks in particular are taking position in Brazil. But the panic in the markets is throwing all these plans off. As for the "person in the street", the situation is more like Japan than Korea, in the sense that they've had stagnation for a long time. They are only now beginning to crawl out of the hole. The problems of polarization of wealth, income, and opportunity have stretched everything to the limit. The malls with high-priced imported consumer durables are beginning to experience a real hit, as the upper classes pull in due to wealth effects there. Some interesting microcredit and other social initiatives have been proceeding, but these may get lost in the maelstrom. I read an interesting paper by Christina Penido and a coauthor (sorry, paper is at school and I don't remember her name), which shows clearly that Brazil, Argentina and Mexico have taken very different paths to financial liberalization in the 1990s. If you check out the trends in capital flows and market prices, however, you'll see that all three countries are being hit in the same way. That is, it's about a flight from the South, not about market structures and rules. So Fernando Henrique may fiddle, but will anyone dance? At the end of my second seminar at the Federal University of Rio, I gave a bleak assessment of the policy options open to Brazil at this point. Fernando Carvalho, my host, began his comment by saying, "I think I am even more pessimistic than you". By the way, for those interested in checking out some of the trends: A really interesting source for such gawking, if an incomplete one for developing markets, is www. bigcharts.com, which readily pulls up historical data in graphical form. Gary Gary Dymski Department of Economics University of California, Riverside Riverside, CA 92521-0427 Phone: 909-787-5037 x1570 Fax: 909-787-5685 Email: [EMAIL PROTECTED] (office) [EMAIL PROTECTED] (home)