I’ve had some fascinating discussions with entrepreneurs, academics and investors here in Brazil. Among the more interesting things that keeps coming up is that outsiders have generally been much more optimistic than Brazilians about Brazil over the last five years — and the Brazilians have been wrong. Despite their self-skepticism, their economy is growing nicely, inflation is under increasingly better control, they’re running a budget surplus, and the employment picture is improving.
Granted, all is is not milk and honey (or the Brazilian equivalent) here. Some of the biggest issues for Brazil: Interest rates that remain stubbornly high (11.25%), poor matriculation rates at universities (less than 14% of high school graduates go on to complete university), and a huge (16%-ish) wage gap between the public and private sectors. Further, bureaucracy and corruption are improving, but both are far from where they should be.
All of the preceding said, the Brazilian economy has done fantastically well over the last few years, and the insiders and experts have largely been wrong. Why? Lots of reasons, but I increasingly think that history can be a prison in fast-changing markets & economies. Old Brazilian hands will tell you about all the times policy "X" or "Y" or "Z" has been tried in the past, didn’t work, or made things worse, and that things will be no better this time. Those views are admittedly rational, appropriately skeptical, and informed by history (which can be an able guide), but tjhey were wrong this time. Why?
We quant types talk about regime changes — world shifts in the things that were causally related or at least correlated in the past but that aren’t necessarily the same in the future. Recent history could be a blip in Brazil, and there will undoubtedly be rocks ahead — not least because almost 20% of Brazil’s exports are destined for the struggling U.S. economy — but is it not also possible that we have seen a statistical regime change in a fast-developing economy? And could it be one that longtimers are much less equipped to recognize these changes than others?