Forget the 2012 Olympics — the building site on reclaimed wasteland in Essex. The Olympics to watch is the event four years later in Rio de Janeiro, and not just for the delights of beach volleyball on Copacabana.

Rio’s lucky break, in which it trounced Chicago to become the first Latin American state to host the Games, means $14 billion of investment and these numbers tend to climb.

This Olympics is the one to watch because it could go wonderfully right or spectacularly wrong; a hint of the latter came only two weeks after the announcement of the city’s win when a turf war between rival drug gangs erupted, killing 29 people in the city’s sprawling slums.

The Olympics is good for all Brazilians, not just Rio’s citizens, the cariocas, selling beachfront real estate. It is good because the gaze of the world’s big financial players has temporarily settled on Brazil and, with World Cup football in 2014 and the Games two years later, the scrutiny could last for years.

Money is falling on Brazil like a rainforest downpour — $31 billion (£19 billion) in foreign direct investment is expected this year. Portfolio investment of some $17 billion has pumped up the stock market and sent the real, Brazil’s currency, rocketing upwards.

A strong currency is not something that Brazilians know a lot about — Latin America’s biggest nation is more used to inflationary booms and busts. Fearing a loss of foreign customers, Brazil’s exporters complained and, on Monday, the Finance Ministry obliged. Brazil imposed a 2 per cent levy on foreign investment in stocks and bonds. Stock market traders and analysts howled, the Bovespa share index dived 4 per cent and the IMF wagged its finger.

The financial markets held their breath — was Brazil about to drift backwards into a world of protectionism, exchange controls and rackety finances?

The real has been buoyed upwards with optimism over the country’s rapid bounce back from recession in the spring and its rising commodity trade: iron ore, soya, sugar, coffee and orange juice.

The central bank has tried to suppress the real with purchases of dollars. The idea is that the tax will help to finance the currency intervention, but most economists think it is futile, a political gesture.

The point is that Brazil is not China; it does not trade that much. Where China’s motor is manufacturing exports, Brazil is largely a self-sufficient economy, more like the United States, with a vast hinterland of eager, albeit poor, consumers.

Doug Smith, head of Latin America research at Standard Chartered, reckons that there was no need for the tax. Instead of deterring foreign share buyers, Brazil should have removed import tariffs on capital goods, he says.

Lower import duties would stimulate investment in manufacturing, while the foreign purchases would help to keep a lid on the real. “Every now and then, Brazil tends to shoot itself in the foot with measures like this,” he says.

He worries whether the investment tax might be a harbinger of things to come: “It could be a glimpse of what the next government might be like.”

President da Silva, (known to every Brazilian as Lula) completes his second and final term next year. His immense support (President Obama called him the most popular politician on Earth) has proven to be a problem for the Workers’ Party in finding a successor.

The President’s choice is Dilma Rousseff, his chief of staff, a less charismatic figure than Lula and thought to lean further leftwards. She was minister of energy and promoted nationalist laws that will give Petrobras, Brazil’s national oil company, the lion’s share of offshore oil discoveries.

Most investors will give Brazil the benefit of the doubt because of its extraordinary achievements. The Treasury is packed with technocrats, Mr Smith says, who transformed a ramshackle debt-laden boom-boost economy into one that has enjoyed years of budget surpluses and has accumulated more than $200 billion in foreign reserves.

Brazil is interesting precisely because it is not an export-led Asian manufacturer. Exports made up only 13 per cent of Brazil’s GDP last year. The unexpected recovery in the spring, which Mr Smith expects will push Brazil into 0.6 per cent GDP growth this year and 3.8 per cent next year, was generated by the purchasing power of many millions of low-income Brazilians.

Brazil is a bet on its poor: how many can be lifted out of poverty and how quickly.

Since he came to power in 2003, the former union boss, who never completed his schooling, has danced a delicate samba between the fiscal conservatives in his Treasury and his supporters at large. He launched a massive expansion in money transfer to the poor, notably Bolsa Familia (family stipend), cash payments of up to $100 per month that this year supported 12 million families.

By lifting these people from squalor into the cash economy, Brazil has acquired economic momentum. It looks attractive to investors, to manufacturers of consumer products and, if tariffs were lowered, to makers of high-tech machinery. Brazil has a big motor and aerospace sector.

President da Silva’s successor needs to maintain the speed and the direction. We will watch the volleyball on the beach but it is the political football that really matters.

carl.mortished@thetimes.co.uk

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