The Wall Street Journal: Economics Project, Article Review Example

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Article Review

A recent article in the Wall Street Journal reports that Brazilian President Ms. Dilma Rousseff has complained to the U.S. President Barack Obama that fiscal and monetary policies by the U.S. and other developed nations have been creating economic difficulties for developing nations. Ms. Rousseff claims that the western policies have been driving currency speculators to Brazil while also appreciating the value of Brazilian currency. Ms. Rousseff delivered a similar complaint to Germany’s Angela Merkel during a visit there. The article also mentions that foreign direct investments (FDI) by American investors have been increasing in Brazil to take advantage of the country’s growth potential (Lyons & Barkley, 2012).

The article is a great example of the impact of fiscal and monetary policies on both the country’s GDP as well as international trade. The U.S. Fed has been keeping the interest rates near zero because low interest rates help the economy recover and grow by making it cheaper to borrow. Low interest rates spur both investment and consumer spending which is the government’s objective in order to recover in the wake of the recent financial crisis.

Similarly, an expansive monetary policy increases the supply of money and lowers the value of domestic currency against foreign currencies. As a result, the local currency depreciates which helps the country in the international trade. It is now cheaper for foreign customers to buy American products while it becomes more expansive for Americans to buy foreign products. The improvement in trade of balance also helps the country grow by increasing demand for local products at the international level. This is why Ms. Rousseff is concerned because policy actions like the U.S. have put Brazilian producers at a disadvantage due to inflated value of Brazilian currency. The speculators have also entered Brazil because they are betting Brazil would be forced to devalue its currency in order to become more competitive in international trade.

The proposed solution suggested by Ms. Rousseff is for the U.S., Germany and other developed countries to increase interest rates as well as avoid expansionary monetary policies to make the competition fairer for developing economies including Brazil. It would drive away speculative activity in Brazil and also help increase the demand for Brazilian producers. One reason why American investors are attracted to Brazil is also the fact that profits earned in Brazil translate to greater amounts when translated to U.S. Dollars for reporting purpose.

Ms. Rousseff’s concerns are legitimate because currency depreciation and low interest rates do provide an advantage to domestic producers but Ms. Rousseff should also realize that countries have to look at their interests first. Moreover, many developed countries, especially those in the Euro Zone have been hit hard by the recent financial crisis so they would take any steps they can to recover. Developing countries might be facing slower growth but they are not in as dire position as are some developed countries many of whom have never seen the crisis of this magnitude before in their entire histories. Moreover, expansionary monetary policy and low interest rates are not entirely safe options because they also carry the risk of inflation. As the article points out, the recovery by developed countries may also benefit developing countries like Brazil by increasing FDI as well as demand for products produced in developing nations. If it were up to me, I would also probably continue with the current U.S. policies until inflation becomes a serious threat or the economy has significantly recovered its pre-financial crisis health.

Reference

Lyons, J., & Barkley, T. (2012, April 9). Brazil Leader Slams U.S. Money Policy. Retrieved April 28, 2012, from http://online.wsj.com/article/SB10001424052702303772904577334073710653532.html

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