Connect to share and comment

Why is a Big Mac in Brazil so expensive?

Is Brazil's economy cursed? Diseased? Or just overvalued?

Brazil’s biggest oil fields haven’t started producing in earnest, but a surge of foreign money is coming into the country already, not only chasing oil, but other commodities and investments too. Although Brazil’s vast internal market for manufactured goods is likely to cushion the blow, Ueno’s research suggests his country has caught its own version of Dutch Disease.

“I would say we’re in the early stages,” he said.

Signs may already be evident in some of Brazil’s manufacturing sectors. Take, for example, shoes. Annual exports dropped by almost 50 percent between 2005 and 2010, according to Brazilian Association of Shoe Manufacturers, known as Abicalçados.

It remains to be seen what if any further effect the looming oil boom will have. Brazil’s economy is the 8th-largest in the world – ahead of Canada, India and Russia – and industry only accounts for about a quarter of its GDP.

But oil affects more than just the economy. In her 1997 book “The Paradox of Plenty,” Terry Karl argues that a sudden in-rush of oil money often corrupts a government as easily as it drags down an economy.

“Led by governments that seemed incapable of sound economic management or planning, most of the oil-producing nations found their economic performance and their oil and debt dependence worse than in the pre-bonaza years,” she wrote.

Other economists have called such petro-state woes “the resource curse” and some say there’s evidence it’s taking hold in Brazil.

A pair of researchers at the London School of Economics published a study spanning three decades and 5,000 Brazilian municipalities, concluding that, in towns already receiving oil windfalls, much of the money goes missing. Municipal employees end up with bigger houses but other residents don’t seem to. Also, the researchers said, oil significantly increased the chances the mayor or other officials would be accused of corruption, charged with embezzlement or arrested by Federal Police.

“All of these things seem to go up if your municipality gets a lot of oil,” said Guy Michaels, one of the authors. “If Brazil isn’t more careful, then a lot of money, at least a lot of the money that goes to the local level, might get lost along the way.”  

http://www.globalpost.com/dispatch/brazil/101008/why-brazil-big-mac-so-expensive