Brazil's Rising Currency

Voices are frequently raised these days urging China to let its currency float upwards. In principle I don't disagree, although I think the timing of this is an important issue. 2007 may well be a hard year all round, and I can well understand the Chinese reticence. Here today is a salutory little tale about the Brazilan shoe industry. The Brazilian Real has risen by 60 per cent against the US dollar since January 2002. This is part of global 'rebalancing' but it is not without its attendant difficulties as the shoemakers point out. We need to remember that these are all developing economies, and that everything is not always either black or white here. In the longer run it is in everyone's interest that the developing economies 'develop', and a certain amount of patience is called for.

“We are suffering in an incredible manner,” says Jorge Luiz Faccioni, vice-president of the Novo Hamburgo association of trade and industry.

The immediate cause for complaint is the exchange rate. The Brazilian Real has advanced by 60 per cent against the US dollar since Mr Lula da Silva took office in January 2002. This has eroded the competitiveness of Brazil’s exports and made its products vulnerable to cheap imports at home – especially from emerging low-cost producers such as China.

The exchange rate, ironically, is a result of an export boom over the past four years. Brazil’s trade surplus will exceed $40bn (€32bn, £21bn) this year for the second year running. But, increasingly, exports are being driven by demand – from China and other faster-growing economies – for raw materials such as iron ore with little or no added value.

The impact on manufacturing industry is potentially devastating. “We are destroying our value-added export industries,” Mr Faccioni says. “If we don’t find a solution, we will see the deindustrialisation of Brazil.”

This is particularly frustrating for the footwear industry because Brazil’s shoe makers are among the most technologically advanced in the world. Companies have invested heavily in modernisation over the past decade and many have relocated part of their production to Brazil’s less developed north-east to save on labour costs.

But such efforts have been undermined by the exchange rate. Exports of shoes fell from 212m pairs in 2004 to 189m in 2005. From January to August this year exports were down 11 per cent from last year’s level.

Many in the industry are demanding direct action on the exchange rate, either in the form of capital controls on short-term money entering Brazil to take advantage of its very high interest rates, or through central bank intervention in the foreign exchange market.