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News
(Source: The
Economist, November 12th 2009)
Brazil takes off
Now
the risk for Latin America’s big success story is
hubris
Rex Features
WHEN, back in 2003, economists at Goldman Sachs
bracketed Brazil with Russia, India and China as the
economies that would come to dominate the world,
there was much sniping about the B in the BRIC
acronym. Brazil? A country with a growth rate as
skimpy as its swimsuits, prey to any financial
crisis that was around, a place of chronic political
instability, whose infinite capacity to squander its
obvious potential was as legendary as its talent for
football and carnivals, did not seem to belong with
those emerging titans.
Now
that scepticism looks misplaced. China may be
leading the world economy out of recession but
Brazil is also on a roll. It did not avoid the
downturn, but was among the last in and the first
out. Its economy is growing again at an annualised
rate of 5%. It should pick up more speed over the
next few years as big new deep-sea oilfields come on
stream, and as Asian countries still hunger for food
and minerals from Brazil’s vast and bountiful land.
Forecasts vary, but sometime in the decade after
2014—rather sooner than Goldman Sachs
envisaged—Brazil is likely to become the world’s
fifth-largest economy, overtaking Britain and
France. By 2025 São Paulo will be its
fifth-wealthiest city, according to PwC, a
consultancy.
And, in some ways, Brazil outclasses the other BRICs.
Unlike China, it is a democracy. Unlike India, it
has no insurgents, no ethnic and religious conflicts
nor hostile neighbours. Unlike Russia, it exports
more than oil and arms, and treats foreign investors
with respect. Under the presidency of Luiz Inácio
Lula da Silva, a former trade-union leader born in
poverty, its government has moved to reduce the
searing inequalities that have long disfigured it.
Indeed, when it comes to smart social policy and
boosting consumption at home, the developing world
has much more to learn from Brazil than from China.
In short, Brazil suddenly seems to have made an
entrance onto the world stage. Its arrival was
symbolically marked last month by the award of the
2016 Olympics to Rio de Janeiro; two years earlier,
Brazil will host football’s World Cup.
At last, economic
sense
In
fact, Brazil’s emergence has been steady, not
sudden. The first steps were taken in the 1990s
when, having exhausted all other options, it settled
on a sensible set of economic policies. Inflation
was tamed, and spendthrift local and federal
governments were required by law to rein in their
debts. The Central Bank was granted autonomy,
charged with keeping inflation low and ensuring that
banks eschew the adventurism that has damaged
Britain and America. The economy was thrown open to
foreign trade and investment, and many state
industries were privatised.
All
this helped spawn a troupe of new and ambitious
Brazilian multinationals (see our
special report). Some are formerly state-owned
companies that are flourishing as a result of being
allowed to operate at arm’s length from the
government. That goes for the national oil company,
Petrobras, for Vale, a mining giant, and Embraer, an
aircraft-maker. Others are private firms, like
Gerdau, a steelmaker, or JBS, soon to be the world’s
biggest meat producer. Below them stands a new
cohort of nimble entrepreneurs, battle-hardened by
that bad old past. Foreign investment is pouring in,
attracted by a market boosted by falling poverty and
a swelling lower-middle class. The country has
established some strong political institutions. A
free and vigorous press uncovers corruption—though
there is plenty of it, and it mostly goes
unpunished.
Just as it would be a mistake to underestimate the
new Brazil, so it would be to gloss over its
weaknesses. Some of these are depressingly familiar.
Government spending is growing faster than the
economy as a whole, but both private and public
sectors still invest too little, planting a
question-mark over those rosy growth forecasts. Too
much public money is going on the wrong things. The
federal government’s payroll has increased by 13%
since September 2008. Social-security and pension
spending rose by 7% over the same period although
the population is relatively young. Despite recent
improvements, education and infrastructure still lag
behind China’s or South Korea’s (as a big power cut
this week reminded Brazilians). In some parts of
Brazil, violent crime is still rampant.
National champions
and national handicaps
There are new problems on the horizon, just beyond
those oil platforms offshore. The real has gained
almost 50% against the dollar since early December.
That boosts Brazilians’ living standards by making
imports cheaper. But it makes life hard for
exporters. The government last month imposed a tax
on short-term capital inflows. But that is unlikely
to stop the currency’s appreciation, especially once
the oil starts pumping.
Lula’s instinctive response to this dilemma is
industrial policy. The government will require
oil-industry supplies—from pipes to ships—to be
produced locally. It is bossing Vale into building a
big new steelworks. It is true that public policy
helped to create Brazil’s industrial base. But
privatisation and openness whipped this into shape.
Meanwhile, the government is doing nothing to
dismantle many of the obstacles to doing
business—notably the baroque rules on everything
from paying taxes to employing people. Dilma
Rousseff, Lula’s candidate in next October’s
presidential election, insists that no reform of the
archaic labour law is needed (see
article).
And
perhaps that is the biggest danger facing Brazil:
hubris. Lula is right to say that his country
deserves respect, just as he deserves much of the
adulation he enjoys. But he has also been a lucky
president, reaping the rewards of the commodity boom
and operating from the solid platform for growth
erected by his predecessor, Fernando Henrique
Cardoso. Maintaining Brazil’s improved performance
in a world suffering harder times means that Lula’s
successor will have to tackle some of the problems
that he has felt able to ignore. So the outcome of
the election may determine the speed with which
Brazil advances in the post-Lula era. Nevertheless,
the country’s course seems to be set. Its take-off
is all the more admirable because it has been
achieved through reform and democratic
consensus-building. If only China could say the
same.
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