Keeping Stability at All Costs.(Global Investor)

Byline: Ruchir Sharma; Sharma is head of emerging markets at Morgan Stanley Investment Management.

The global crisis has thrown most states into a fink, but life's still a beach in Brazil, thanks to shrewd management.

The current 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 percent 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 centered 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 percent 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 capitalize 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, the country has typically suffered some sort of crisis every five years. The last one was in 2002-03, when markets feared Brazil might cave 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 programs--were also guided by this desire to achieve stability. Result: an annual growth rate of 2 percent in the 1980s and '90s, and nearly 4 percent during the global boom period stretching from 2003 to 2007--but still well short of the average 7 percent 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 ...