Brasil-Great Expectations

Brazil: Great expectations
By John Paul Rathbone and Jonathan Wheatley
Published: September 28 2010 22:29 | Last updated: September 28 2010 22:29

Guests at a São Paulo campaign rally gather before a picture of outgoing president Luiz Inácio Lula da Silva and Dilma Rousseff, who leads opinion polls in the run-up to Sunday’s vote. Like her former boss, Ms Rousseff is a believer in activist state
Brazil is a happy country – or so many believe. Indeed, the flair of the country’s football, the collective ecstasy of its carnivals, its multiracial inheritance and, of course, that skimpy swimwear are all part of Brazil’s immense “soft power”. Add in a fast-growing economy and Brazilians can – according to Luiz Inácio Lula da Silva, the country’s outgoing president – lay claim to being “the happiest and most creative” people in the world.

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There is some truth to this boast. On the eve of presidential elections expected to return Mr Lula da Silva’s preferred candidate, Brazil has seemingly never had it so good. Although still scarred by gaping social inequality and violent crime, it is one of the fabled fast-growing Bric economies – Brazil, Russia, India and China – that are reshaping the international order. Last week’s $67bn share offering by Petrobras, the state-controlled oil company, is the world’s largest ever and just the latest expression of Brazil’s emerging financial clout. The country is already an important regional hub for capital formation; by 2025 it is forecast to be one of the world’s five biggest economies.

In the past, Brazilian elections have often been the catalyst for financial crises – and the blasé attitude of many investors to the October 3 vote is a sign, to Jim O’Neill, the Goldman Sachs economist who coined the Bric acronym, that “people may now be getting carried away”.

Nevertheless, on the foreign policy stage a long-time bit-player is now a serious contender for a permanent seat on the United Nations security council. On issues such as Iran, Brasilia has also sought – not wholly successfully – to play the role of international broker. And as the host of the next football World Cup and, in 2016, the Olympic Games, Brazil has confidently arrived on the global stage.

GROWTH AT THE MARGINS

Over the past decade, Brazil’s economy has grown an average 3.5 per cent a year, almost double the previous decade’s average. The country may be happier, but it is also fatter. About half of all men and 48 per cent of women are overweight, against only 19 per cent of men and 28 per cent of women in the 1970s.

Nonetheless, the “body is beautiful” ethos continues in other ways. Brazilians brush their teeth, on average, more than anyone else, and reputedly consume more underarm deodorant per capita than the US – just two reasons why international consumer goods companies consider the Brazilian market so important

Like many of its Latin American neighbours Brazil has never been short of promise – or disappointment. The question now is whether this time really is different.

Judging by the reaction of investors, pundits and many Brazilians themselves, it is. Others are more cautious. For Luis Alberto Moreno, head of the Inter-American Development Bank, the biggest risks facing Brazil are “complacency and hubris”.

For the moment, optimists appear to have the upper hand. Foreign investors, who have stumped up for last week’s Petrobras offering, will pump a further $50bn or so into the country this year. A flurry of recent books celebrate Brazil’s “arrival” and its increasing self-confidence. Meanwhile, Mr Lula da Silva, whose leftwing roots are in the trade union movement, is poised to leave the presidential palace with an 80 per cent plus approval rating – a notable endorsement from a country that sailed through the global financial crisis largely unscathed and has seen more than 30m join the ranks of the middle classes in five years.

Dilma Rousseff, the president’s former chief-of-staff who now looks set to romp home in the election, has staked her claim on the leadership by promising more of the same. A former Petrobras chairwoman, the stern technocrat – sometimes dubbed, predictably perhaps, the “Iron Lady” – is a firm believer in the power of an activist state. The Petrobras offering, which she took the lead in designing, will increase government power over the company. Ms Rousseff is also responsible for a series of massive road, port and railway investment programmes, part-funded by state-owned banks, that Brazil desperately needs to improve its dilapidated infrastructure. They are under way but, bogged down by bureaucracy, not at the pace many had first imagined or she had hoped.



Her biggest political opponent, José Serra, the centrist governor of São Paolo, has been unable to make headway with a platform that appears to be a slimmed down, more efficient version of Mr Lula da Silva’s socially-orientated policies. Indeed, polls show that across the classes Brazilians are largely happy with their lives and believe they will get even better.

Instead, the biggest challenges facing Ms Rousseff lie deeper in the country’s social and economic plumbing. For all its success, Brazil remains in many ways a grossly unequal country that is living beyond its means. Although poverty has fallen by a third during the past decade, more than one-fifth of the country’s 200m people are still officially considered poor. National debt levels have dropped, but the country still depends on foreign savings to finance itself. Despite a commodity export boom, its current account deficit this year is forecast to be about 3 per cent of gross domestic product. It could increase next year.

BUSINESS CULTURE

A spirit of adventure born of plantations and Portuguese seafarers

Is history destiny? The origins of what many businesspeople recognise as particularly Brazilian talents can be traced back to the late 15th century race between Spain and Portugal to exploit the new world, writes Jonathan Wheatley.

Both countries were looking for a sea route to Asia, says Professor Alfredo Behrens of São Paulo’s FIA business school. The Portuguese found one and became merchants. The Spanish found America and become conquerors.

The Portuguese also found Brazil, but largely ignored it until it became their sole overseas possession after they lost their Asian trade routes to the Dutch.

“They had to concentrate on Brazil,” says Prof Behrens. “By then they were merchants through and through. They knew how to negotiate. They had jogo de cintura [a knack for flexibility and problem solving]. This is what makes Brazilians different from other Latin Americans.”

He traces other Brazilian characteristics back even further, to the expulsion of the Muslims from the Iberian Peninsula during the Middle Ages and the subsequent fall in population. This created a culture of low-density ranching rather than high-density agriculture, translated to Latin America in the form of enormous plantations controlled by a few wealthy landowners and worked for centuries by millions of African slaves.

Echoes of this hierarchy – and a resulting distance and lack of trust – endure in the workplace, he says. “This leads to a personalism that tries to override those processes, where people try to be friends with the boss [and] to the jeitinho [another hard-to-translate concept of personal flexibility], and a spirit of adventure that means people may only stay put for a while and are dreaming of bigger things.”

And this, he says, creates a business culture that foreigners sometimes find it hard to handle: “One British banker told me it was like trying to lead a herd of cats.”

It is also a culture that fosters creativity and enterprise. Rolf Steiner, regional head at Swiss Re in São Paulo, was previously based in Italy, and says he was delighted to find an atmosphere of openness and creativity in the reinsurer’s Brazilian offices after the much more conservative business environment he had encountered in Italy.

It is the kind of comment heard in many sectors. Tarek Farahat, chief executive of Procter & Gamble in the country, counts Brazilian executives among the most talented in the company’s global operations.

But one of the most famous examples of Brazilian overseas enterprise – Anheuser-Busch InBev, the world’s biggest brewer, created and led by Brazilians – is an exception that proves the rule, says Prof Behrens.

“Brazilians are better negotiators than our Latin neighbours,” he points out. “But that doesn’t mean we don’t have our conquerors

That complacency is also the achilles heel of the Brazilian economy. The country aspires to be a global power but to reach the next level, analysts argue, it needs to move on to a new stage of economic performance, one focused on the provision of better – not just more – public services, especially in education.

The violence that still plagues its infamous slums makes Brazil a more deadly place than supposedly drug-torn Mexico. Álvaro Uribe, the former president of Colombia, is just one leading regional figure who believes Brazil is paying “insufficient attention” to domestic drug consumption and related crime. From his own country’s experience in the 1990s, and Mexico’s today, he points out that “drug trafficking is a problem you avoid tackling at your peril”.

Meanwhile, Mr Lula da Silva’s extraordinary rise from shoe shine boy to president has projected Brazil’s image as a land of promise and social mobility. But like so many American stories, it is part myth. “Overseas, Lula has become a symbol of a land of opportunity, where the poor can make it,” says Fernando Henrique Cardoso, president for two terms before Mr Lula. “That’s not really true.” Brazil, for all its recent success, remains the 11th most unequal country in the world.

Elsewhere such a gulf could have led to open civil conflict. But Brazilians’ generosity, their predilection for tolerance and conciliation – or complacency, some critics say – has kept greater violence at bay. “How else can you explain the fact there is not constant open war in Rio de Janeiro, when you have the very poor living in favelas cheek by jowl with the super-rich,” says Julia Oliveira, a management consultant.

The state, famous for its inefficiency and bureaucracy, also needs slimming down. A cut to state spending, for example, would lift national savings and so limit the country’s dependence on foreign capital. That would immunise it from financial contagion should the global economy take a turn for the worse. Without it, says Neil Shearing, an analyst at Capital Economics, Brazil risks a return to the boom-bust pattern of the past, with good years “punctuated by recessions caused by sudden stops in capital flows”.

Almost 70 years ago the novelist Stefan Zweig wrote of Brazil as “the country of the future”. That optimism is reflected in the national psyche – although the stressed faces of city workers on the bustling streets of São Paolo may suggest otherwise. Zweig’s catchphrase, at any rate, became a slogan, then a cliché, and finally an impossibility for Brazilians to live up to – as much a “stigma as a prophecy”, in the words of Brazilian writer Alberto Dines.

However, thanks to the economic reforms enacted by Mr Cardoso when he was president from 1994 to 2002, the foundations for the country’s economic stability were laid. For the next eight years, despite recurrent corruption scandals, Mr Lula da Silva’s social policies then helped make the country more at ease with itself. The coming elections are the first since 1982 in which neither man is running for office.

They leave behind a country that is more prosperous and socially cohesive than, arguably, it has ever been – and a probable president, Ms Rousseff, who has pledged to maintain the policies required to keep that economic stability in place. The country has a thriving private sector and three-quarters of Brazilians say they believe in the market economy, according to a Pew Research Centre poll, compared with less than half of Mexicans and Argentines. All this creates a platform that suggests the country’s recent performance will be more than a flash in the pan – even if Brazil has undoubtedly been the lucky beneficiary of the commodity boom and globally abundant liquidity, conditions that will not last forever.

Compared with the other Bric countries, Brazil may never be able to match, say, China’s ability to execute ambitious strategic initiatives in schooling or technology. It also needs to embark on further reforms to lift its trend rate of growth from about 4 per cent now. At the same time, it lacks many of the other Brics’ structural drawbacks, be they India’s religious divisions, Chinese authoritarianism or Russia’s ambivalent relations with the west. Its immigrant history has also left it with an openness to foreign ideas and an ability to adopt them quickly.

Indeed, one of these can be read on the headrests of every seat on the domestic flights of TAM, the country’s biggest airline. “Brazil: the world’s fifth biggest economy by 2025”, it declares. For those Brazilians who pinch themselves at the thought, it is telling that the statement is credited to The Economist, a foreign publication. The rest appear happy with – critics such as Mr Cardoso say “anaesthetised by” – the relative prosperity of the status quo.

“Brazil could become otherwise,” says one Brazilian who works as the lead economist at a major western bank in São Paolo. “But then we wouldn’t be Brazil. We’d be Switzerland . . . and that wouldn’t be any fun.”