Brazil: Boom, Bubble or Doom?

By Maria Zammit (Braslia - DF), 2 November 2011 (updated on 21 December 2011)

Author's note: In this Opinion I have attempted to question and answer the relevance of Brazil
in today's economic and political context, in order to give the reader a general idea of the
positive and negative features of the country, the successes achieved and the challenges
ahead. All information in this Opinion is from open sources deemed to be reliable and verified
to the best of the author's ability. The author does not accept any responsibility for any loss
arising from reliance on it.

In recent years Brazil's role in the world stage as a potential economic and political
superpower has been the subject of much discussion.

In fact, ever since the sensational acronym "BRIC" was coined by Goldman Sachs to
denote the economic potential of Brazil, Russia, India and China, academics and
analysts, as well as businessmen and government officials, have had their eyes on
all four emerging markets. Many - have placed their bets on Brazil.

As a result, foreign investment has poured into the country in an unprecedented
fashion. World leaders have passed glowing accolades and paid honour to their
"new global partner"; and every nation and organisation has endeavored to re-
enforce its relations with Brazil in anticipation to its rising economic and political
clout.

Unfounded Euphoria
The question yet remains whether the euphoria around the speculations and
predictions for Brazil matches reality. Many sceptics have argued that the hype is
unwarranted. Undeniably, there are problems in Brazil that are deeply woven into
the economic, political and social fabric of the country.

Poverty, crime and education
With 16,2 million people living in extreme poverty (2011 est., IGBE, Instituto
Brasileiro de Geografia e Estatstica [Brazilian Institute of Geography and Statistics]),
and more struggling to get by, it is not surprising that crime has also soared to
epidemic levels. The homicide rate alone is as high as 22.7 homicides per 100,000
inhabitants (2011 est., UNODC, United Nations Office on Drugs and Crime), the third
highest in South America.

Trapped in a vicious circle that is hard to break, poverty and crime are often fuelled
by the shortcomings of a welfare system that is under increasing pressure to offer
good-quality primary education. Brazil's well-known Bolsa Famlia (family
allowance), which operates under the Fome Zero (Zero Hunger) network, operates
by giving financial aid to poor families on condition that their children attend school.
But schools remain underfunded and the quality of primary education remains poor.
In turn, the best universities, which are public and free, get filled by wealthy students
from private high schools, while poorer students from public schools end up paying
for night classes and second-rate degrees at costly academies.

Inflation and inefficiency
To add insult to injury, Brazil is expensive - very much so for the poor Brazilian, but
also quite so for the average European tourist. Inflation spiked in September 2011 to
its highest level over six years, as consumer prices rose by 7.3% from a year earlier
(IBGE Oct. 2011 est.), making the Brazilian Real (BRL) the world's most overvalued
currency.

True, some foreign investors might not be dissuaded by inflation. However, with an
average of 119 days just to set up a company in Brazil, they might avoid the country
altogether because of the plethora of regulatory issues and the excessively lengthy
bureaucracy. But the downsides do not end here. Qualified workers are scarce and
expensive, and, with labour laws ripped from the pages of the corporatist labour code
of Mussolinis Italy, the business environment remains a restrictive one.

Protectionism
With the exception of Mexico and of the Mercosur nations, doing business inside
Brasil from outside Brazil is not a viable option. During his term of office so far,
Finance Minister Guido Mantega has resorted to a number of protectionist measures
aimed at reducing imports and increasing local productivity - needless to say, at the
further cost and detriment of the foreign investor.

Thus, whilst previously foreign firms interested in the recently discovered pr-sal
(pre-salt) oilfields could bid for all concessions on equal terms as the state-controlled
Petrobras, now they may only bid concessions as junior partners. For car-
manufacturers, instead, protectionist measures have led to a catch-22 situation: if
they make cars abroad, they will pay high imports, whilst if they set up in Brazil,
they'll avoid import taxes, but making cars will cost them 60% more than making
them in China due to the poor infrastructure and pricey credit. Imported tablet
computers would also cost more - precisely a third more than locally produced
tablets. This is why Taiwanese manufacturer Foxconn embarked on a USD 12 billion
plan to produce iPads in Brazil.

Government's failings and corruption
Brazil's return to the familiar practice of protectionism has put into question whether
the country can actually move forwards. This fear is reminiscent of Charles de
Gaulle's infamous remark that "Brazil is the country of the future and will always
be because Le Brsil nest pas um pays srieux (Brazil is not a serious country).
Many Brazilians themselves tend to adhere to this view - except, of course, when it
comes to music and football.

Admittedly, however, even the country's legacy of football has been recently slapped
in the face, for it is becoming clear that promised improvements to the countrys
infrastructure in preparation for the World Cup of 2014 are being broken. Not only is
the construction or upgrade of stadiums behind schedule, but of 49 planned urban-
transport schemes in the host cities, until October 2011 work had only started on
nine. The President of FIFA has written to Brazil's President Dilma Rousseff
expressing concern. To be sure Ms Rousseff has cause to worry about FIFA, not
merely because of the delays but also because the person who has been running it
all, President of the Brazil World Cup committee Ricardo Teixeira, has a history
tarnished by suspicions and accusations of embezzlement, money laundering and
tax evasion.

But what is corruption if not another national sport of the country? Most observers
agree that corruption, present in all levels of Brazil's society, represents a major
problem. In one year from the outset of President Rousseff's administration, six
ministers have already been sacked over corruption claims. Translated to numeric
figures, the annual cost of corruption for the state and society in general is estimated
to amount to roughly USD 5 billion or 0.5% of GDP (2010 est., FGV, Fundao
Getulio Vargas [Getlio Vargas Foundation]).
Is the glass half empty or half full?
These realities depict an image of Brazil that is bleak and dispiriting, to say the least,
and still hardly any mention has been made of the other daily problems of Brazil,
from illegal logging of forests to the poaching of protected species and the
displacement of indigenous peoples; the abductions; the trafficking of drugs, animals
and humans; the sad stories of child prostitution and those of modern-day slavery.

Nonetheless, be it as it may we ought to consider looking at the bigger picture - and
we ought to recognise that, unquestionably, over the past few years Brazil has
transformed itself in a most remarkable way.

To start with, the country has made major strides in its efforts to raise millions out of
poverty. In the last decade, the number of people living in poverty decreased by at
least 20 million (2010 est., UNHLTF, UN High-Level Task Force on the Global Food
Security Crisis) and the proportion of people living in hunger was reduced by one-
third (2011 est. FAO, Food and Agriculture Organisation). Thanks to policies like
Fome Zero, Brazils successes in reducing poverty and increasing food security
significantly outshine those of India and China where economic growth has actually
been faster (2010, Oxfam).

As more people are gaining better living standards, more are pursuing their
education; and as a thriving middle class is spreading across the country, Brazil's
economy is propelled by a progressively expanding purchasing power. In a 2010
report on private equity in Brazil, Ernst & Young praise this consumerist boom and
hail the country as an ideal location for consolidating industries, effecting operational
improvement and capitalising on untapped markets. It is quite certainly this
promising scenario that induces companies to persist on entry into the Brazilian
market despite certain difficulties and expenses encountered on the way. In fact,
looking back at Brazil's past, it is possible to recognize that, regardless of the
continued existence of protectionist measures, there has been substantial trade
liberalization and an unprecedented welcoming of foreign investment.

In a time of great global demand, Brazil's wealth in natural resources is another
reason why FDI continues flowing in. Truly and surely Brazil has everything - from
iron to cattle and agricultural products, 14% of the world's renewable fresh water and
more. Already established as a leading exporter of iron ore, steel, soybeans, coffee,
sugar and beef, Brazil's discovery in 2007 of gargantuan pre-salt oil deposits,
trapped several miles under the sea bed beneath a hard layer of salt, is generating
billions of dollars in new revenue annually.

With all the foreign investment pouring in, recent governments have increasingly
injected more money into the country's poor infrastructure and other much needed
projects. Unfortunately this practice must be controlled lest inflation takes an even
more sinister turn. Less worrying for the country's economy but more worrying for
the country's integrity, is the fact that public spending is also that area most badly
riddled by corruption. But whilst corruption remains a concerning matter, we should
take our hats off to current President Rousseff's intrepid undertaking to clean up the
countrys politics, as well as to Brazil's Federal Police (PF) that currently has nearly
30,000 active investigations related to public corruption and fraud (2010 PF est.).

In any which case, contrary to the past, Brazilians are no longer peacefully accepting
what comes their way: the press investigates and discusses corruption scandals
freely and with the only purpose of getting to the truth, and recently a number of anti-
corruption demonstrations that have erupted throughout the country have succeeded
in mobilising the country's electoral bulk.

The future is NOW
Winds of change are indeed blowing all the way through the vast landscape of Brazil.
Already the biggest economy in Latin America, in March 2011 the Brazilian
government announced that Brazil became the world's seventh largest economy,
achieving an economic growth of 7.5% during 2010, tantamount to the fifth highest
out of all the G20 countries.

Brazil's shift up the world's economic ladder comes at a time when no country has
been left unscathed by the economic crisis in the United States and the European
Union (Brazil, in particular), and demonstrates the country's resilience and strength,
economically, but also politically. A stable democracy, with a strong voice in all
global matters, and strong alliances with the world's other powers, Brazils growing
political clout is now extremely tangible.

Undoubtedly, Brazil has always had a lot to live up to - simply because of its size. A
diagnosis of underperformance may at times be a matter to be wary about, but at
others it may be purely an unfounded reaction to the high expectations meted out by
the media and analysts. In truth, Brazil's reality can be summarised simply as,
"much achieved, more to do". Clearly, Brazil has already shown initiative and
commitment, and, much as de Gaulle might have rebuffed this conclusion, it is now a
nation with the ambition, resources and socio-economic fundaments to achieve its
full potential. As US President Barack Obama very well observed:

"Brazil has long been known as the "pas do futuro" (country of the
future). But [...] somehow [...] the future never quite arrived.

For so long, Brazil was a nation brimming with potential but held
back by politics, both at home and abroad. For so long, you were
called a country of the future, told to wait for a better day that was
always just around the corner.

Meus amigos, that day has finally come. And this is a country of the
future no more. The people of Brazil should know that the future
has arrived. It is here now. And its time to seize it."

United States of America President Barack Obama, Teatro Municipal, Rio de Janeiro, March
20th 2011, Addressing speech to the people of Brazil


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