-OpEd-

BUENOS AIRES — In the past 35 years, volatility has characterized the economies of Brazil and Argentina, especially compared to other countries, though Argentina's is by far the more unstable. Over that time, Argentina's GDP has contracted 12 times and grown by more than 8% in 11 periods, while Brazil's declined in six calendar years and grew by over 8% just four times.

This volatility is also reflected in the total losses during all the recessions (18.4% in the case of Argentina and 7% for Brazil), as well as in total gains (40% for Argentina and 35% for Brazil).

The fluidity goes a long way toward explaining low levels of investment, anemic average growth rates, high costs, frequent bankruptcies, high unemployment levels and intermittent socio-political crises. It's essential for both countries to pinpoint the factors behind it and forge the social and political pacts needed to mitigate it.

After several promising years of growth and improvements in the population's living standards, Brazil is currently undergoing one of these periodic crises. So far, it's resulted in a decline of more than 2% of GDP, vigorous currency devaluation, intensifying inflation, massive corruption scandals and government support in freefall.

Brazil's historical experience shows that almost all these crises have a similar dynamic: In simple terms, the seeds of each are sown in boom periods that are misinterpreted by the authorities and economic actors.

Price increases on export products amount to a wage increase for employees. Their incomes go up, giving them more to spend. People tend to use these extra earnings to pay debts, to increase production (buying machines, vans, etc.), to spend more on housing, holidays and other consumer goods, and to save more money. It's good both for production levels and employment.

The government also benefits because it takes in more taxes (including export levies), and its foreign accounts improve thanks to the rising value of exports.

The cycle thus reaches its expansion stage: Foreign investors are attracted to a country with improved economic growth and a favorable fiscal balance. They decide to increase investments, both real and financial, in that country, which further boosts its incipient boom.

In that context, many countries are tempted to raise the value of their currencies, and in the case of Brazil, it allowed the country's GDP in dollar terms to rise from $511 billion in 2002 to $2.63 trillion in 2011.

A chink in the armor

This revaluation weakened its external competitiveness but allowed Brazilian companies to buy foreign competitors. The last stage of the expansive phase comes when the government, tempted by growing revenues, augments spending to satisfy the population's needs.

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Peace and progress in Rio de Janeiro Photo: Daniel Zanini

Increased spending could be sustainable if it led to more investments, but experience shows that governments tend to increase consumption simultaneously with the private sector. With Brazil, the savings rate declined from almost 20% of GDP to a little over 15%.

But this time, in contrast with the past, debt didn't increase. In the past, crises were more intense because of a tendency in boom times for increased consumption to fuel debt.

The evolution of raw material prices over the last century shows highly volatile behavior but in a long-term setting of relative stability. The broad pattern is of cycles of rising prices inevitably preceding periods of declining prices — like now.

The dynamics generated by these price falls are exactly opposed to the conditions described above, in addition to the fiscal and external accounts slipping into deficits and countries facing a painful process of departure of capital, adjustments and political crises.

That is what is happening, and has happened before, in Brazil. The only way to mitigate these cycles is to save in boom times to avoid cuts in the lean years. These savings can take the form of "financial savings," or investments to improve productivity and future output. Brazil didn't do any of this, and will not be able to avoid a decline in living standards.

But it did partially avoid the temptation of becoming indebted, converting part of its debts into other currencies, accumulating considerable reserves and acting early to devalue the real (which reduced the dollar value of the Central Bank's liabilities). And that has meant stronger defenses this time, against the current fiscal and financial crisis.