Brazil in perspective
March 14, 2014

Untitled Document

“Brazil is the country of the future.” That is how the saying goes…..

I spent a few minutes trying to find the best word to capture what has happened to us in the past decade, regarding our view about Brazil. Were we naïve, ingenuous, or just plain foolish? Why did we believe that this time would be different? The first decade of the XXI century was very good for Brazil. In 2003 everybody was relieved when after the inauguration, Lula showed that he was not going to change much, he was not going to drive the country to the left and jeopardize the progress we had achieved after the “lost decade”( as the 80’s were called) . Lula is a very smart and charismatic politician and soon enough the world was falling in love with him and with Brazil. Who doesn’t remember when Obama looked at Lula in 2009 at a G20 meeting and said “that is my man, right here.” During his tenure, Brazil won the bid to host the soccer World Cup in 2014, and Rio de Janeiro won the bid for the 2016 Olympic Games. Who doesn’t remember, also in 2009, the front page of The Economist? (If you don’t remember or didn’t see it, it is at the end of this newsletter) .The confluence of sound macroeconomic indicators plus the international liquidity and the Chinese boom gave us a good ride. The ride was so good that we forgot who we really are: a country with a low level of education, low productivity, a scarcity of skilled labor, bad infrastructure, and corrupt politicians. A country that is poor, with a GDP per capita of only USD 10,000.00 despite having the world’s 8th biggest economy.

With money flowing into the country, iron ore prices at its height, and an abundance of credit, complacency was the norm. Why reform if everything was going so well? Why invest in infrastructure if we can expand the welfare state instead?

In retrospect, the truth is that we were not doing so well, just okay, and surely not well enough to justify the euphoria. The chart below shows that in 6 out of 11 years, Brazil grew less than other Latin American countries. Brazil grew less than Peru, for instance, in all years except for 2010.

Brazil also grew much less than China in the same period.

History also shows us that Brazil grew less when compared to other periods: between 1950 and 1970 the average annual GDP growth was 7, 4%. During the 1970’s, which were also a period of great liquidity, Brazil grew at an average of 8.5%. More interesting, the capital inflows were directed to infrastructure projects. No, I am not forgetting that it was also accompanied by excessive external debt and that we “paid” dearly for that in the 80’s. Although the problems eventually passed, the infrastructure remained. I maintain my position that notwithstanding the current pessimism in Brazil we are not in crisis and I don’t see the situation unraveling. I don’t see a larger devaluation on the exchange or a sudden and substantial decline on reserves. I don’t see a downgrade in the investment grade rating, at least until the elections. That being said, those predictions do not necessarily indicate good news. History has shown that we (Brazilians) only change when there is a crisis, when the situation deteriorates so much that we are forced to leave the comfortable position of doing nothing to do something. In good times complacency is the norm. So the big question is what will happen after the elections- given that nothing is going to happen until then. Either PT wins with Dilma or somebody else wins. All my friends hope that somebody else will win, and actually believe in that possibility. I don’t. The creation and expansion of the welfare state is a very powerful tool for the PT. I might be proven wrong but I believe that most of the beneficiaries of that system will vote for Dilma. For the vast contingent of people affected for those policies PT became an icon of poverty reduction.

So the question becomes what four more years of Dilma will mean. What will the policy makers do in a more “hostile” environment, with less liquidity, rising interest rates and a slowdown in China and other markets? Even if somebody else wins, can we catch up, can we become competitive, and can we have more growth? I fear that , with the PT government , as the international conditions worsen- meaning Brazil will not be lifted by the tide that help us in the 2000’s- populism, interventionism, and voluntarism will increase. That would be the quickest way for Brazil to become Venezuela.

The world is changing way too quickly and I think that whoever wins will face a difficult time. There is an energy revolution going on with the shale gas in the USA which will give an edge to its manufacture sector. There is also a technological revolution going on, the so called second machine age and again the USA is ahead. The increase in productivity brought by digital technologies is going to be significant and unfortunately the emerging markets are far behind .The USA will continue to be a country with a business class that has a remarkable ability to innovate and adapt. Brazil will continue to be the country of the future and it will always be……

2009 The Economist cover

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