July 9, 2012 7:33 pm
Brazil: After the carnival
Brazilians are starting the debate on whether to embrace a state-led economic model
©Eyevine
A hard walk: while many Brazilians rely on river ferries, much infrastructure of the same vintage is rickety and needs a massive overhaul
Recruited this year from a club in Guangzhou, southern China, the young footballer has quickly started speaking some Portuguese.
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IN Analysis
Click to enlargeAlthough the club claims he was recruited purely for his talent, most suspect the real role of Mr Chen, the first Chinese player to join a major Brazilian team, is to lift the club’s profile in China so that it can sell its distinctive black-and-white team merchandise there.
Corinthians may not realise it but, through its canny use of an area in which Brazil has a natural competitive edge – football – to tap the Chinese market, the club in its own small way is providing a pointer for a country whose economy suddenly seems to have lost direction.
Elsewhere, exporting success from such kinds of innovation has proved elusive. Over the past decade, Brazil has largely relied on exports of commodities such as soy and iron ore to fuel spectacular economic growth, which peaked at 7.5 per cent in 2010.
But this growth has slowed to a crawl and the world’s second-largest emerging market is expected to expand only 2 per cent this year. Much of its industry, in spite of a seemingly endless series of stimulus measures, has become globally uncompetitive. Only the consumer seems to be holding the fort but even here, there are signs of fatigue. Despite surging growth and investment, infrastructure and education have lagged behind and their weakness has prevented the country from realising its full potential.
After the first decade of the century, in which everything seemed to fall into place for Brazil, policy makers are now abruptly being forced to rethink the country’s strategic direction. The issue at stake: what kind of economy does Brazil want and how big the role of the state should be?
“We want to consume like US consumers, we want to have the public services of the Europeans but we want to grow like an emerging market, so something has to give,” said Ilan Goldfajn, chief economist at Itaú, Brazil’s largest private sector bank.
It is a question troubling not just Brazil but all emerging markets. With the European, US and Japanese models looking battered, there are few global gold standards left to guide policy makers through the gathering storm clouds. Indeed, the next few years will be critical for the direction of the world economy as each of the Bric nations – Brazil, Russia, India and China – is tempted to revert to old socialist or statist habits to protect jobs and markets.
“This is where you’ve got to navigate without a lighthouse,” says Raghuram Rajan of the University of Chicago and a former chief economist of the International Monetary Fund. The challenge, he says, will be for countries to take what has been learnt in the west without “abandoning the western model totally”. “How do you get the good side of markets without being exposed to the underside?”
Much of Brazil’s remarkable run of prosperity was characterised as the “Lula model” of development, named after former President Luiz Inácio Lula da Silva. During his two terms between 2003 and 2010, he saw the size of Brazil’s middle class increase by more than 30m people through welfare transfers, rising salaries and increased consumer credit.
As growth slows focus shifts to the home front
As in Brazil, so in other emerging economies: growth is slowing, and as it slows it is raising serious questions about the economic future of the developing world, writes Stefan Wagstyl. Growth in emerging markets’ gross domestic product will slow this year to 5.7 per cent, from 6.3 per cent in 2011, according to the International Monetary Fund.That is well above the 1.4 per cent increase forecast for the developed world. But it is a hefty discount to the 8 per cent recorded up to 2008. The decreases are driven mainly by a slowdown in the developed world, principally Europe.
Commodity exporters, headed by Russia, have profited mightily from the price boom that followed the 2008-9 economic crisis. But the recent price fall is starting to hit their economies.
Developing countries also face growing domestic difficulties, however.
In India, for example, decades-old bottlenecks in infrastructure and labour supplies have kept inflation high, forcing the central bank to maintain high interest rates even at the cost of hurting investment. Elsewhere, notably China, Brazil and Turkey, there are concerns that recent loan growth – fuelled by sustained low credit flows from the west – has generated unproductive investments and will trigger rising bad debts.
Policy makers have contained these threats – so far. But slowing growth increases the dangers. Even a slight slowdown can exert a disproportionate impact on sensitive credit-fuelled sectors. Once a few investors run scared, others can quickly follow.
In the long run, the rise of the emerging economies is likely to continue. Investment flows to countries where it can achieve the best returns – and these are still to be found in the developing world with opportunities for low-cost exports and for local domestic market growth.
The developing world’s growing middle classes will not want to be denied their desire for western-level living standards. The pace of emerging market growth is likely to be slower than 8 per cent, however. It will also, most likely, depend less on exports to the rich world and more on emerging-world demand, both within countries and in expanding south-south trade.
However, the adjustment could be hard, especially for countries with poor reform records, not least Russia. Much will also depend on the availability of cross-border credit and investment. The bigger the financial shocks from the eurozone and other as-yet-unexploded financial bombs, the harder the transition will be.
Furthermore, this year President Dilma Rousseff, a taciturn technocrat compared with Mr Lula da Silva’s rough-edged unionist charisma, pushed unemployment down to record lows of below 6 per cent and increased the minimum salary. This has rewarded her with a staggering personal approval rating of 77 per cent.
But the Lula model, skewed towards state-led consumption, also lacked an effective strategy to increase the capacity of the country’s infrastructure or education systems to handle the surge in growth. Inflation, the nation’s longstanding curse, which hit 2,477 per cent in 1993, began to return, forcing the central bank last year to increase interest rates to levels that brought the party to an abrupt halt.
Brazil’s strong currency also squeezed industry, sending it into recession. Auto companies have begun suspending or laying off workers, while private banks are holding back on lending after defaults hit a record high during May.
“We are exactly in this turning point,” says Mr Goldfajn. “There was a need to decelerate the economy, so wages continued to rise but prices could not follow and that meant margins got squeezed.”
The slowdown, which is being worsened by softening commodity prices and the eurozone crisis, has reopened a debate about why Brazil seems unable to grow faster than its long-term trend growth of about 4 per cent before inflation kicks in.
Perhaps most disturbing is an astonishing lack of international competitiveness of many Brazilian industries, even in sectors that should enjoy a natural advantage.
Gerdau, Latin America’s largest steelmaker, blamed weak profit growth in its latest results on an increase in raw material prices – iron ore, mineral coal and scrap. This is even though Gerdau is based in a country that is one of the world’s biggest exporters of quality iron ore.
The company spoke of the “deindustrialisation” of the steel supply chain in Brazil, as cheap imports from Asia undercut its products. Indeed, Carlos Ghosn, chief executive of Nissan-Renault, complained last year that it was cheaper for him to import steel made in South Korea from Brazilian iron ore, than to buy local products.
Most critics also point to infrastructure, particularly Brazil’s roads and ports, as another impediment. The cost of exporting a container from Brazil is $900, more than double the price from China and 1.5 times that from India. Meanwhile, importing costs are almost triple that of China and nearly double that of India, according to the World Bank.
“It is a disaster, ships sometimes have to stop for 90 days,” Eike Batista, Brazilian oil and logistics billionaire, told an investor meeting this year.
The other huge bottleneck in Brazil is skilled and semi-skilled labour. In the global “Pisa” test measuring average reading and mathematics scores, Brazil ranks near the bottom of the league tables, behind many other developing countries.
Thanks partly to poor education, productivity in Brazil has increased by only 1.5 per cent a year over the past decade compared with 4 per cent in China, according to Marcos Troyjo, of Columbia University.
A shortage of local professionals is now affecting growth industries. Ricardo Guedes, head of recruiter Michael Page in Rio de Janeiro, says some clients in the booming oil industry have been so desperate to fill positions they will pay almost anything. “For a couple of positions, we don’t even mention salary.”
Many of Brazil’s problems, however, are not bad ones to have. They often stem from rapid economic growth, preferable to the stagnation afflicting Europe, the US and Japan.
Indeed, the crisis has cemented a consensus in Brazil about the need for greater investment. At current levels of about 19 per cent of GDP, investment is short of the 22 per cent Brazil needs to expand its economy at about 4 per cent a year.
The government’s response to this issue has been more constructive than in 2009, when it unleashed massive state lending, analysts say. This time it has encouraged the central bank to lower Brazil’s extraordinarily high benchmark interest rate – a legacy of its history of runaway inflation. This has fallen to a record low of 8.5 per cent and is expected to drop further this week.
Lower interest rates will help to foster greater investment in infrastructure. Until now, investors were able to earn such high returns from short-term deposits they had little incentive to invest in riskier, long-term infrastructure projects. In addition, companies could not afford to borrow long term because rates were too high.
“There is a clear perception we need to get the investment going, the difficulty is how,” Itaú’s Mr Goldfajn says.
Among the challenges are an unwieldy government bureaucracy and tax system – even when the funds are available for investment, projects often get stuck because of red tape. Vale, the country’s largest miner, for instance, complains that it takes more than three years to get environmental clearances for its mines.
There is also the problem of a lack of savings. Brazilians only save 16 per cent of GDP, a fraction of the levels in China and India. The Brazilian government is a big part of the problem – it taxes like a European government yet wastes most of it on salaries, pensions and interest payments. Brazilian public revenue is equal to about 36-38 per cent of GDP compared with about 25 per cent in South Korea.
But shrinking government will be hard. As analysts point out, big government is a choice the Brazilian voter has made. Even faced with the decline of the European economies, the average Brazilian is still more likely to opt for a state-led model, such as China, than pure US-style, free-market capitalism.
“It used to be that all of Latin America looked to Europe as its ideal model, and that one day Brazil, Argentina and Colombia would become a Portugal, Italy, Greece or Spain, if it was lucky. But now, given the eurozone crisis, that is no longer the case. And, increasingly, China is becoming a more attractive or plausible model,” says a Brazilian diplomat.
To fill the investment gap, therefore, Brazil must attract foreign capital. Foreign direct investment hit a record $66.7bn last year, up from $48.5bn in 2010, but outsiders will demand adequate returns to continue coming. In the long run, these returns can only come from improvements in productivity. Brazilians and Brazilian companies will need to work smarter and become more innovative.
Private sector initiatives, such as that on display at Corinthians, offer hope. Even here, however, some of the comments from Mr Chen on the differences he has noticed between Brazil and China say much about why South America will not be another Asia anytime soon.
“In China, not much people [are] interested in football. The children are studying too much.”
With additional reporting by John Paul Rathbone and Jonathan Wheatley in London
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1 - Lula's model was not state-driven growth: he had no model. His model was to employ all the union leaders and leftist politicians rejected by the voters in the state-owned companies (they are all rich now,what a surprise - so much for the left wing anti-capitalism ethics), run them down to the ground using corruption or incompetence (or a combination thereof), and surf in the good winds of the rising commodities and growth forged by FHC, his predecessor and truly the best Brazilian president ever. He just didn't touch the economic model for eight years, in a rare glimpse of self-awareness, as he realized he (and his team) knew nothing about it. When in doubt, do nothing - thank you, Lula, for not destroying that which your predecessor created - and that by the way, you commanded your party to vote against in a disservice to the nation.
2 - Brazil opted too soon for the welfare state. Lula created a welfare state before creating wealth to distribute. The entire world applauded his wealth distribution projects. No-one added the numbers to see if they made any sense, but the front page of The Economist belongs to the semi-illiterate president trying to save his country from hunger by handing out cash, not to the hundreds of people saying Brazil could not afford that bill. That was a populist move, which we all know to be unsustainable. Now Dilma finds herself trapped, as the public spending increases, welfare costs are up in heaven and the economy just doesn't grow. She also has to put up with all incompetents hired in the Lula years - no wonder she sacked 6 or 7 cabinet ministers in the first year of her mandate, all on account of corruption (you don't say!). I wonder who put them there (and kept for 8 years) in the first place...
3 - China is a more attractive model for Dilma, Lula and the rest of the pseudo-democrats in South America (one of which just said publicly that the laws must serve the politics - what is that?). This has nothing to do with economy. It is about ideology. Lula and Dilma, just like Kirchner, would love to control the press and end freedom of speech. They would also like to reign free of the constitution. Remember that Dilma is a former terrorist - please do not think she was fighting for freedom against the military dictatorship, she was fighting for a socialist dictatorship - freedom was never in the menu. That is why China is so appealing to her and to Lula.
4 - The Lula government will be remembered for the welfare state. It doesn't matter that it didn't work, it made great headlines. Lula will also be remembered for the greatest corruption scandal in the history of the country. The trial starts next month - please cover it. Please give it your full attention. Don't let the world forget that Lula drowned Brazil in the stench of corruption. He tried to blackmail a member of the supreme court a month ago - it was all over the local press. FT, where were you?
“The Brazilian government is a big part of the problem – it taxes like a European government yet wastes most of it on salaries, pensions and interest payments.”
Haha, sensible Brazilians know that this is only the tip of the iceberg. That’s why the Brazilian Titanic keeps sinking. And this journal is trying to tell us that a debate has been started in Brazil about the acceptance, or not???!! of a state led economy.
You just wait for the pre-salt oil to start flowing; the state led party in Brazil will be notched up a few more decibels. I find that deeply sad.
While the social ills stemming from Brasil's horrifying wealth disparity are legendary, China still has nearly one billion people in rural agrarian poverty down on the collective farm, while Shanghai billionaires drive Bentley convertibles through the polluted and fetid air.
Perhaps it is you who need to 'keep studying'...?
Well, they never bothered to take a proper look at what was going on in Greece then.
Anonim_28,,just because an FT article doesn't say everything in Brasil is wonderful doesn't mean it's part of a conspiracy. Moreover, this article is not overlooking the fact that Brasil has important potential to grow, it is actually saying that Brasil has great growth potential but there are impediments that need to be overcome to fulfil that potential. Don't be like the Greeks and think that anything "negative" is part of an Anglo-Saxon/Turkish/CIA conspiracy against Hellenism and react hysterically. If only we had paid attention to what the many impediments were during our "boom" days.
What debate? The Brazilian economy has always been state-led and most Brazilian people are happy with it.