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2010-10-26

Brazil’s economy: The awakening of the dormant giant

The foreign currencies board shows Brazil’s real soaring to its highest level in two years against the U.S. dollar on Oct. 1, fetching less than 1.7 to the greenback as foreign investors piled into the booming economy. (Vanderlei Almeida/AFP/Getty Images)

The foreign currencies board shows Brazil’s real soaring to its highest level in two years against the U.S. dollar on Oct. 1, fetching less than 1.7 to the greenback as foreign investors piled into the booming economy. (Vanderlei Almeida/AFP/Getty Images)

By Ligia Hougland for Infosurhoy.com—26/10/2010

One of the world’s most unequal countries or the first Latin American economic superpower?

The puzzling question has defined Latin America’s biggest nation. It is home to the world’s eighth-largest economy, yet ranks 10th among the countries with the greatest inequalities between the rich and poor, according to the United Nations Development Program (UNDP).

But its future is clear: Brazil is positioned to take off.

Whether the nation is led by the ruling party’s candidate Dilma Rousseff (Workers’ Party – PT) or by the opposition’s candidate, José Serra (Brazilian Social Democracy Party – PSDB), economists, market analysts and worldwide economic publications foresee continuous growth for the next four years.

Five days before Brazilians return to the polls to elect Luiz Inácio Lula da Silva’s successor, Infosurhoy.com presents the series “Which country is this?” featuring stories on the recent conquests and the historical challenges that will be inherited by Brazil’s new president.

Today’s piece focuses on the Latin American giant’s economic strength. The bottlenecks in the country’s infrastructure, the damage caused by corrupt public management, and ongoing social improvements will be addressed during the next three days. (Editor’s note)

WASHINGTON, D.C., U.S.A. – The Brazilian economy is as hot as the nation’s pristine beaches and as talked about as the country’s famed Carnival and five-time World Cup champion soccer team.

“Brazil takes off” was written on the December 2009 cover of British magazine The Economist, which described the country as the most promising nation among an emerging group known as BRIC (Brazil, Russia, India and China).

The Brookings Institution, a renowned think tank based in Washington, D.C., last year published the book Brazil as an economic superpower? highlighting the country’s leadership in the energy, agriculture and technology sectors.

South America’s largest country finally is receiving the international recognition it deserves, Brookings says.

“Brazil has a natural vocation for being a continental economy with an important role in the whole world, if we consider three factors determining the size of an economy: the size of the population, the size of the market and the size of the territory,” said Rogério Studart, the World Bank’s assistant executive director for Brazil, Colombia, Dominican Republic, Ecuador, Philippines, Haiti, Panama, Suriname and Trinidad and Tobago.

Brazil’s trajectory as a major player in the global market began almost two decades ago with the Real Plan. The macroeconomic plan, implemented by former President Fernando Henrique Cardoso, made the initial push to strengthen the Brazilian economy and end inflation.

During the past few decades, the bolstering of the country’s democratic institutions and macroeconomic policies enabled the nation to explore new markets and attract investors.

“Brazil is very attractive to foreign investors, as they seek … a high return rate but also … institutional guarantees and safeguards ensuring they won’t be expropriated from their investments,” says Carlos Pereira, a Latin America specialist at Brookings. “As Brazil offers these guarantees and macroeconomic stability, it’s the ideal space for foreign investments.”

The global economic crisis, which began in July 2007 and has continued to rock the economies of developed nations, arrived in Brazil as a “marola” (little sea wave), as Lula said at the end of 2008.

Lula’s humorous remark was not taken lightly by his critics, yet Brazil not only has powered through the economic crisis relatively unscathed, it’s emerged even stronger, analysts say.

The International Monetary Fund (IMF) said in a recent study Brazil can even run the risk of an overheating economy due to its influx of foreign capital.

Guido Mantega, Brazil’s finance minister, increased the Tax on Financial Transactions (IOF) for foreign investments on fixed income and funds two consecutive times in an effort to restrain foreign capital inflows.

The IOF increased from 2% to 4%, then to 6% two weeks later.

GDP per capita increases by 5.2%, according to IMF

The addition of 29 million Brazilians into the middle class from 2003 to 2009 proves the advancements made by the nation of 184.4 million in reducing social inequalities, according to a study by the Getúlio Vargas Foundation (FGV).

Over the past 12 years, the gross domestic product (GDP) per capita of the Latin American giant increased by 5.2%, according to the IMF. This year, the Brazilian GDP is expected to rise 7.5%, easily surpassing the worldwide average of 4.8% and the 5.7% forecast for Latin American nations.

The IMF predicts a 4.1% growth GDP in 2011.

At the turn of the 21st century, the Brazilian economy made a strong push to establish itself in the international trading market, paving the way for the nation to become a worldwide leader in the exporting of orange juice, sugar, coffee, soybeans, iron ore and meat.

In the beginning of the 1990s, 20,000 exporting companies emphasized domestic demand, only selling their surplus to foreign markets. But they have since prioritized the international market, causing their revenue to triple, according to the Análise Comércio Exterior e Negócios Internacionais de 2010 (2010 Foreign Trade and International Business Yearbook).

During the 1990s, exports represented between 6% and 9% in the country’s GDP. This year, they account for about 14%.

The biggest reasons for the increase include China’s growing demand for commodities and Brazil’s increasing trade with its Mercosur neighbors Argentina, Uruguay and Paraguay.

But Brazil represents only about 1% of total world exports, as it lags behind global leaders Netherlands, Germany and China, whose exports represent 61%, 31% and 25% in their GDP, respectively.

Weak infrastructure hampering growth

Investments in public and private infrastructure are integral if Brazil’s economy is to continue to sustain its growth rate.

Sixty-two percent of all commercial products are transported on inadequate roads. Funding also is needed to improve the conditions of the railways and ports to meet the demands of the country’s trading sector, according to the Análise Comércio Exterior e Negócios Internacionais de 2010.

“It’s not possible to have sustainable growth without infrastructure,” says the World Bank’s Studart.

All Latin American countries recently have seen a reduction in public investment in infrastructure, says Pereira.

But unlike Brazil, countries such as Colombia and Chile have used investments from private companies to offset the shortfall, Pereira says.

“Lula’s administration took a long time to understand the importance of regulatory policies as a way to signal the credibility of institutional safeguards for foreign investments, which has given rise to uncertainties,” Pereira says. “So the private sector hasn’t invested.”

Brazil invests about 1% of its GDP in infrastructure, which is well behind China (20%) and India (6%).

Low education rates and the lack of skilled manpower also hinder Brazil’s development. In education, the country lags behind Chile, Argentina and Uruguay, according to the World Bank.

Brazil continues to attract foreign investors’ attention.

Augusto de la Torre, World Bank’s chief economist for Latin America and the Caribbean, said during the IMF and World Bank’s annual meeting, in Washington D.C., that Wall Street is waiting for the policies of the new Brazilian government.

But Brazilian macroeconomic policies won’t undergo major changes, regardless of whether Rousseff or Serra wins the Oct. 31 election, Pereira says.

Still, Pereira said there could be ramifications if the Workers’ Party remains in power.

“If Dilma [Rousseff] wins, in the middle-term there will be the risk of a greater role of the state in the economy, more specifically with regard to the development of an industrial policy, that is, with the election of some sectors of the Brazilian economy to be favored with tax exemptions or some kind of subsidy,” Pereira says.

Studart, on the other hand, foresees Brazil growing during the next half-century.

“The trend is toward having two processes: the inflow of direct foreign investment and the internationalization of Brazilian companies,” he says. “All investors, especially production investors, are waiting for the definition of trajectories for the four or eight years ahead. Once they are defined, many people will want to invest in Brazil over the next 20, 30, 40 and 50 years.”

“Which country is this?” will examine the impact of high taxes and the lack of investment in infrastructure relating to Brazil’s growth on Oct. 27.

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1 Comment

  • Nayá | 2010-10-27

    Great article! Brazil - A natural-born giant. The little wave has become a Tsunami.