Thomas Digiano

Around the World in 80 Hours #12: Brazil Jumps Off a Bridge

Blog Post created by Thomas Digiano Employee on Mar 7, 2016

Before I leave our adventures in Brazil and turn to South Africa, I wanted to round back to on a point I made earlier about what effect the slow down of the Chinese economy might have on the Brazilian economy. Also, we just saw a guy literally jump off a bridge (he's ok):

 

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Eric Chiang being the consummate world traveler, actually researched how much the taxi ride from the airport would cost us: about 100 Brazilan reals or about $27. The cost ended up being 120 reals, and in fact we found that most prices were about 20% more than expected due to inflation.

 

Historically, Brazil has had lots of problems with inflation. In fact, as recent as the early 1990's, they had hyperinflation, where average goods would costs millions of reals and the price would radically fluctuate to the point where consumers couldn't effectively shop. In short, they lost confidence in the stability of their currency (remember the ongoing theme about the importance of stable institutions) and the economy suffered. In 1994 the government decided to do something radical, and effectively "jump off a bridge" with its currency. They just up and invented a new kind of money that was strictly regulated and [initially] pegged to the US dollar. I'm oversimplifying, what's now a classic macroeconomic case study, but there's a great This American Life episode on it, that really brings it to life.

 

Ok, but what does that have to do with China and paying more for a cab ride? Well, Brazil mainly exports things like transportation equipment, iron ore, soy beans, all of which are typically in heavy demand by their #1 trade partner, China (17% of exports). Unless you've been spending a lot of time in your bunker lately, you've probably heard that the Chinese economy has started to slow from its breakneck growth rate (check out Robert Feenstra's virtual EconED talk on 4/1 to hear why). As their economy slows, they buy less goods from Brazil, which in turn decreases the amount of revenue the government takes in through taxes. There are a lot of reasons why inflation can occur, and I won't pretend to know exactly why, but a couple of likely culprits are several tax hikes the Brazilian government instituted last year, as well as simply printing more currency to make up for the deficit. Paul Krugman talks about something similar with his  "stagnation" talk given at EconED 2014.

 

Brazil's highest inflation in 12 years:

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Enough about inflation, one weird side note before I go: Volkswagen is the best known car brand in Brazil. They have 4 factories here and stopped manufacturing classics like the original "Beetle" and the "Microbus" 10 years after the rest of the world had stopped making them. You still see them all over the place and they seem to be the vehicle of choice for roadside vendors. Between the crazy street art and all the VW busses, Brazil might be the place for you if you're an aging hippie:

 

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Ok, on to a new continent. See you in 'Joburg.

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