Wednesday, December 30, 2009

Brazil takes off/ECONOMIA

Nov 12th 2009
From The Economist print edition
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..

Imagen: Ira Korman/Serpent, 2004

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