Weathering the Storm

The specter of rising food and fuel prices now threatens to destroy an era of unprecedented global prosperity, with two notable exceptions: Brazil and Canada. Both countries produce and export enough food and fuel not just to offset the worst of global inflationary pressures but even to turn the price spike from a menace to a boon. They are the only two major economies where prices have not burst the upper limit of the central bank's inflation target. And of the two, Brazil is by far the more surprising success story. The country that suffered the longest and perhaps the most debilitating bout of hyperinflation in recent history is now a rare island of relative stability and prosperity. Brazil's inflation is running at 6.5 percent, a rate that worries the country's money minders but thanks to their zeal is still the lowest level in all the major emerging markets.

Luck has helped. Brazil is blessed with vast resources, including timber, fresh water, gold and the world's largest cache of iron ore. Farms stretch from horizon to horizon, and while most of the world is running out of arable land, Brazil has more than 70 million hectares still to plow. Plumbing deep water reserves, the country has announced massive oil finds that may total 30 billion barrels, the largest discovery in the Western Hemisphere in three decades. For Brazilians, who once joked that "Brazil is the land of the future, and always will be," this good fortune is a serious shock. "Brazil has had interesting moments before, but this is extraordinary," says Otávio Vieira, executive director of private banking at the Swiss-owned Banco Safdie, who has seen his portfolio swell by 150 percent since 2006.

Although raw materials and semifinished goods still kick in two thirds of Brazil's export revenues, few nations have done as much to develop their natural bounty, whether in mining, energy or agriculture. Brazil has nearly doubled grain production in the last decade and is the only country producing cost-efficient biofuels without beggaring its food larder.

Better yet, the economy has accelerated without overheating. There are other major emerging markets that are growing faster, but India and Russia both have double-digit inflation while China is just shy of that dangerous threshold. No emerging nation has moved earlier or more intelligently than Brazil to head off the cancer of inflation, as evidenced last week when the Central Bank raised the benchmark lending rate for the third time this year.

This comes after a half century of colossal mistakes. The postwar economy surged and plunged so wildly that Brazilians came to call their business cycle o vôo da galinha ("the flight of a chicken"). Before the Plano Real, the economic-stabilization reform of 1994, Brazilians weathered 15 straight years of three-digit inflation—"the longest period of hyperinflation in the modern history," says Central Bank president Henrique Meirelles. Time and again, instead of solid reform, the government responded with ill-advised fix-it plans and price freezes that led only to massive shortages, strikes, riots and new bouts of hyperinflation that rendered the national currency worthless. The detritus is in display cases at the Brazilian mint outside Rio: cruzeiros, new cruzeiros, cruzados, cruzados novos, cruzeiros reaisall emblazoned with national heroes or fauna and flora, each note handsomer than the last. All forgotten now.

By 2001, Brazil's economy was stable but practically dormant. That year Jim O'Neill, the chief economist for Goldman Sachs, coined the term BRICs to describe Brazil, Russia, India and China—the emerging markets he expected to drive the international economy by midcentury. People laughed at the inclusion of Brazil. "I was told that I must have put the B in BRICs to make the acronym sound better," recalls O'Neill.

By 2002, Brazil seemed headed for yet another crisis. The economy was flat, prices were surging and a hirsute former union man with surly words for the free market was poised to take office. But Luiz Inácio Lula da Silva artfully dissembled, playing to the gallery of his companheiros in the leftist Workers' Party, but also quietly breaking bread with business executives, foreign investors and lenders. Lula is not a maverick; he halted the privatizations that were the hallmark of the previous administration and despite his fabulous popularity ratings has failed to advance a single major reform—whether of the loss-making pension system or the corruption-addled political-party structure. He actually increased the already smothering tax burden, from 34 to 36 percent of the GDP, higher than any other remerging market.

But from the beginning he has held a steady middle course, becoming the unlikely paladin of economic stability. He appointed Meirelles, a BankBoston executive, to head the Central Bank and he forced the bureaucrats to slash spending and to build surpluses year after year; in June, he upped the target again from 3.8 to 4.8 percent of GDP. Against howls of protests from the left, industry and his own vice president, he also backed the bitter medicine of the Central Bank. As many developing nations flail at inflation by hoarding food and mandating price freezes, Brazil pre-empted the global food and energy spike by raising the benchmark-lending rate three times this year to 13 percent, one of the highest in the world.