Brazil’s Quest for the Top of the Leaderboard: An Auto-Destructive Strategy

How Brazil may willingly tank its economy through the establishment of a joint trade currency with Argentina. 

Brazil, a pioneer for the Global South and Latin America’s self-proclaimed regional leader, has long been recognized as a potential power in the international system. Initiating its regional-leader trajectory in the 1930s after its adoption of the “national-developmentalist” paradigm, one based on the foundations of industry, Brazil endorsed the promotion of domestic markets through the employment of import substitution tactics, and centre-periphery. Yet the nation’s failed attempts to live up to its full potential in influencing global events have proven insufficient, time and time again. Regional treaties with futuristic, promising proposals such as the Treaty of Asuncion (1991) operated well in their primary years, yet performance from all member countries stagnated as commitment from partner states became less important in their individual agendas — the Treaty of Asuncion dispersing in the late 1990s due to Brazil’s economic crisis whose effect rippled all throughout the region, including in the Argentinian economy’s collapse in 2001. 

In attempts to attain such a goal of regional influence, two diverging approaches were employed: under liberal leadership, Brazil’s attempt at recognition came from avant-garde peacekeeping and notable humanitarian proposals from 1995-2016, whereas under conservative administration, the attempt was directed towards Brazil’s potential economic power in commodity trading. Regardless of whichever approach was taken, success rates have proven inconsistent, with policies not being carried out, agreements being dismantled and audacious claims being contested. Under Jair Bolsonaro’s presidency from 2018 through 2022, the country’s agenda stayed away from regional power and dove deeper into domestic stability given the COVID-19 pandemic and its substantial effects on economies worldwide. With the drastic leadership change from the radical conservative president Jair Bolsonaro, back to extreme liberal leadership under current president Luis Ignacio “Lula” da Silva in Jan 2023, nonetheless, Brazil’s policy agenda returned to the importance of growing regional and international power. 

Amongst many, one of President Lula’s first proposals was the establishment of a joint currency with Brazil’s neighbor and trading partner, Argentina. The currency that would be titled “The Sur” would not be used as a widespread currency. Instead, it would “be a common denominator of trade exchanges,” as understood by Fabio Terra, professor of Economics at the Federal University of ABC. 

Analyzing the currency implementation through different lenses highlights the conflicting outcomes for Argentina and Brazil, with a clear winner and loser in sight. 

 For Argentina, who has been suffering from seemingly-limitless levels of annual inflation approaching 100%, while also owing a $40 billion debt to the IMF for a bailout in 2018, the joint currency approach seems like an efficient bandage on the gaping wound of international debt. For Brazil, nonetheless, binding its monetary flows to such an unstable neighbor would be tying an anchor to a rapidly sinking boat. 

On the other hand, the countries’ bilateral trade is expanding, even “reaching $26.4bn in the first 11 months of last year, up nearly 21 percent on the same period in 2021,” according to the Financial Times. This may motivate the joint currency as a supporting booster between both economies. Yet, it only accounts for 6.5% of their combined gross domestic product. With trade being a crucial primary source of income for Brazil, the establishment of the Sur motivated by facilitated trade with Argentina is no trade-off given its detriments.  In addition, the sectors that pioneer trade in the two countries diverge immensely, from industrial commodities to agricultural goods for Brazil and Argentina, respectively. Such a difference in traded goods results in different responses to trade alterations in global headwinds that might spur from the new currency proposal. 

Furthermore, Brazil’s inflation levels have been thriving on a stable currency regulated by a “vigilant independent central bank,” remaining under double digits throughout the last decade, a staggering 61 percentage points below Argentina’s inflation levels. As highlighted in a recent article by the Atlantic, “Brazil’s monetary policy has credibility in international money markets; Argentina has had to impose capital controls to keep people from buying dollars.” The divergences in the nation’s economic performance economically through the past years can be attributed to significant divergences in policy approaches, which could be yet another issue factor when considering the establishment of the Sur. 

With the launch of the idea to the public eye, significant figures in the realm of international economics have spoken out about their opinions on the proposal. Olivier Blanchard, former chief economist of the IMF, mercilessly characterized the operation as “insane” and “a terrible idea.” For Brazil, doubtlessly, the insanity is clear. Why, then, is the country so headstrong about the merger? Surprisingly, a similar proposal was made in the late 1980s, following the neoliberal influence of chile, to replace the Brazilian Cruzeiro and Argentine Austral as a trade currency, but the idea fell short due to economic turmoil in 1988 sprouted from rampant inflation encountered by Brazil and an arduous debt crisis occurring in Argentina. 

The reintroduction of a joint currency for Brazil can be attributed to the country’s continued attempts to dominate the Latin American region through forms of soft and hard power. Economically, Brazil’s avant-garde approach to lifting Argentina from the ashes of financial turmoil, on paper, would allow it to reinforce its regional dominance as a liberal state providing support to one of its neighbors. Simultaneously, the Brazilian government sees the Sur as an opportunity to challenge the current economic system’s reliance on the US Dollar in trade. From the Brazilian perspective, the support of this idea provides the country with a “reputational boost from being seen to revive regional cooperation,” while also “[clawing]back trade with Argentina it has lost to China in recent years.”

 While on paper, the idea seems plausible and the potential accomplishments of the plan seem beneficial to Brazil as a growing regional and global power, the detriments coming from the implementation of the Sur would provide a drastic counter effect to such benefits, leaving the country in a worse state than in the outset of the plan. “Hitching Latin America’s biggest economy to that of its perennially volatile neighbor” would not work as smoothly as the neighboring states in question envision it. Not only would the Sur tether instability to Brazil’s economy, diverting investments and furthering trade relations, but it would also prove inefficient for the complications of the free flow of capital and labor across borders — a crucial aspect of currency shock balancing. The Sur simply lacks the mechanism that working currency unions bear: where European farmers transit seamlessly between jobs and member states, “South America’s poor infrastructure makes travel a hassle, and Argentina’s capital controls make getting paid across borders nearly impossible.”

Brazil should not be fooled by the enchanting tale of valiantly rescuing itself, Latin America and eventually the Global South, from dollar dominance marching across the international arena in a white stallion; certainly less so when said stallion, Argentina, has no legs. As a result, the growth potential that has been historically attributed to Brazil’s powerful economy remains — under the plan of the Sur — presently unattainable.