KEY POINTS:
The global economic crisis has been traumatic enough to throw many countries into a deep funk. But, in Brazil, life is still a beach.
No, it's not as if Brazil is completely unaffected by the worldwide collapse in economic growth. After expanding at an average of nearly 4 per cent over the past five years, the Brazilian economy is set to slow to a crawl in 2009.
Capital flows are shrinking and credit is harder to come by in the country as well. But given its long history of crises, Brazil's reaction to the current shock is more along the lines of "we have seen this movie before" - and its past experience has seasoned the nation to weather such storms.
There's also a sense of relief that the latest episode is centred around a global growth meltdown and is not homegrown in nature.
This mood is perhaps best reflected in a record-high approval rating for President Luiz Inacio Lula da Silva.
With an 80 per cent rating, he must be the most popular leader in the world and he has achieved this in part by assigning all blame for the sudden stop in the country's growth to developments in the United States while continuing to capitalise on the five years of unprecedented stability he has presided over.
But another reason for the divergent reaction in Brazil compared with many emerging markets in Eastern Europe and Asia is the country's main policy objective this decade of seeking stability above all else, rather than the "growth at any cost" mantra in several other emerging markets.
Brazil had good reason for doing so. Since 1980, it has typically suffered some sort of crisis every five years.
The last one was in 2002-03, when markets feared it might cave in under its huge debt burden. Since then, it has made remarkable progress in reducing its dollar debt, building up a large war chest of foreign exchange and anchoring inflationary expectations.
Brasilia's policy initiatives - including targeting a low inflation rate and increasing spending on social programmes - were also guided by this desire to achieve stability. Result: an annual growth rate of 2 per cent in the 1980s and 1990s, and nearly 4 per cent during the global boom period stretching from 2003 to 2007 - but still well short of the average 7 per cent growth across the developing world during the same period.
While the importance of stability in fostering sustainable growth cannot be underestimated, it's safe to say that it would have been difficult for Brazil to achieve any of its objectives without the support of the roaring bull market in commodities.
Therein lies the key to Brazil's growth. Commodities such as iron ore and soybean make up 55 per cent of Brazil's exports.
And even though exports, at 15 per cent of GDP, form a not-too-large share of the economy, evidence from the past few decades shows that Brazil's growth rate has oscillated around an average 2 per cent, and variations from that trend are largely explained by commodity price swings.
Commodity prices have fallen sharply during the past few months but remain well above the average levels of the past two decades, providing the economy with some cushion.
And since Brazil never recorded the gangbuster growth rates of other commodity exporters such as Russia and parts of the Middle East, it finds itself better able to cope with the present dire external funding environment.
Brazil does not have a significant amount of debt to roll over this year. To fund growth, Brazilian companies did not leverage their balance sheets as aggressively as other companies did during the liquidity boom of the past few years.
In effect, the Brazilian economy has managed to move to a lower-volatility regime, whereby it will be able to avoid the boom-bust cycles of the past - especially compared with other major commodity-exporting nations - after long being considered the soft underbelly of the emerging-markets world.
But the low ambition on the growth front also implies that it will be a very long time before Brazil can break out of its middle-class existence. That means the country's policymakers can no longer be content with just achieving stability. They will now have to think more in terms of how to put the country on a faster growth track.
Brazil's productivity growth over the past two decades has averaged an abysmal 1.5 per cent, as businesses have been stifled by a prohibitive tax structure.
The Government has been compelled to maintain high taxes to fund its huge spending, which, at 37 per cent of GDP, is extremely high for a developing country. And for all the work done towards promoting stability, little has been done in the way of structural reforms, such as cutting the extremely large share of taxes in the economy or amending unwieldy labour laws.
These changes are required to fully unleash the entrepreneurial energy in the country and boost Brazil's long-term economic growth trajectory.
Brazil must then stop soaking in the glory of its last victory, get off the beach and work towards moving higher on the development plane. Otherwise, its growth profile will remain relatively unimpressive and vulnerable to commodity price swings. And if commodity prices fall further, even Brazil's much-heralded stability could come under threat.
* Ruchir Sharma is head of emerging markets at Morgan Stanley Investment Management.
