The BRIC laggard

By David Rohde
September 28, 2012

SAO PAULO – For decades, Denis Dias’s parents could never break into Brazil’s middle class. They started a bakery and a pizzeria in the 1970s and 1980s, but the country’s economic instability and hyper-inflation consumed their businesses and their hopes. His father ended up owning a newsstand. His mother worked as a maid. And Denis attended dilapidated state-run schools.

Over the last 10 years, Denis and at least 35 million other Brazilians have achieved their parents’ dream. Denis is a corporate lawyer at a Brazilian energy company and a new member of Brazil’s middle class, now 100 million people strong. Denis, his company and his nation have ridden the exports of iron ore, soy, oil and other natural resources to prosperity.

But Brazilians ranging from Dias to business leaders to government officials say Brazil must develop a more sophisticated economy and effective government if it hopes to continue its rise. While attention has focused on political turmoil in India, China and Russia, Brazil has quietly emerged as the economic laggard of the BRIC countries.

“Brazil is not competitive,” Dias lamented. “We need to change.”

Two weeks ago, Brazil’s finance minister announced that the country’s economy grew at an anemic 0.6 percent in the first half of 2012, far below South Africa’s 3.2 percent, Russia’s 4 percent, India’s 5.5 percent and China’s 7.6 percent during the same period. Even Latin American rivals Mexico, Chile and Colombia are growing faster, as is the United States.

Other indicators are worrying as well. In 2011, the World Bank named Brazil 126th out of 183 countries in its “Ease of Doing Business” rankings, a drop from 120th the previous year. Fears are high here that the country’s unsolved structural problems will prevent it from returning to the 4 percent average annual GDP growth it enjoyed over the last decade.

“Brazil will continue growing at pretty anemic rates,” said Pablo Fajnzylber, the World Bank’s lead economist in Brazil. “It will likely not go back to that 4 percent.”

To become a sophisticated economy with consistent growth, experts say President Dilma Rousseff must double Brazil’s spending on infrastructure, radically reform an education system that produces far too few skilled workers and engineers, ease high taxes and byzantine regulation, and curb corruption.

The ruling Workers Party defends its performance. In an impressive economic feat, middle-class Brazilians – defined by the government as a family of four making $600 to $2,500 per month – rose from 38 percent of the population in 2002 to 53 percent today, according to the World Bank.

A combination of strong economic growth and former President Luiz Inácio Lula da Silva’s famed “bolsa familia,” or “family allowance” program – the largest conditional cash transfer program in the world – reduced poverty by 40 percent. Extreme poverty – defined as families struggling to obtain enough food – dropped by 50 percent, and Rousseff has vowed to eliminate it.

Dias, the corporate lawyer, moved from Brazil’s working class to its elite. His wife, who has an MBA from a Brazilian university, works for a local company that helps American franchises open in Brazil. Their newborn son will attend an elite private school, not a decrepit government one.

With Denis’s help, his 60-year-old mother has turned the house where he grew up in south São Paulo into a palace of Brazilian-style consumption. There are four televisions, four bedrooms, three bathrooms and two refrigerators, as well as an Xbox, DVD player and laptop computer.

“When I was a maid, I would work for 10 days without going home,” Dias’s mother, Lourdes, said as she proudly showed off her comfortable home. “Now the working conditions are much better, the payment is much better, and you have a choice who you can work for.”

Maria de Fatima Silva, a maid and 53-year-old mother of three who lives in the neighboring Monte Azul favela, agreed. As São Paulo’s middle class has expanded, bidding wars have erupted over maids, a longtime Brazilian prestige symbol.

Silva said that her earnings have doubled from $250 a month to $500 a month over the last decade while her work days declined from eight hours to six. At the same time, rising wages and the work of a non-profit group vastly improved living conditions in her favela.

“Now, it’s better,” she said, praising life in Brazil. “I used to work more and earn less. Now, I work less and earn more.”

But what comes next, many Brazilians are asking, as the country’s economy slows. Rousseff, a little-known former Marxist guerrilla who later became an economist, served as the chief of staff of charismatic former President Lula. Like her predecessor, she has proved more centrist and pragmatic than expected.

In August, she announced a $60 billion project to double the country’s highways and railways. In an ideological shift for her party, she invited Brazil’s private sector to participate.

New educations reforms are designed to ease a dire shortage of engineers that has prompted Brazilian companies to hire engineers from Spain and other struggling European countries.

And a core problem remains Brazil’s tax system, one of the most onerous and convoluted in the world. Dias, the corporate lawyer, said citizens and companies are increasingly frustrated with paying tax rates that rival those of Western Europe and not receiving commensurate services.

“People are getting really disappointed,” he said, “because it doesn’t achieve results.”

For the last decade, Brazil’s achievements have been impressive. But now, its barriers to growth, government corruption and low education levels are catching up with it. To extend its prosperity, it needs to shift from relying on natural resources to developing human ones.

PHOTO: Brazilian President Dilma Rousseff participates in the meeting of the Economic and Social Development Council at the Planalto Palace in Brasilia August 30, 2012. REUTERS/Ueslei Marcelino

4 comments

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GDP growth for the sake of ‘growth’ is not the ‘be-all/end-all of prosperity. Brazil has accomplished much with it last decade of growth, and that growth has ‘mostly’ been used widely across the society to improve the live of most Brasilieros, particularly those ‘below the poverty line.

That is the most remarkable achievement of Brazil’s last decade, which is not particularly shared by its BRIC colleagues. Growth, as in the US which is not broad-based, leave gaping disparities in fairness, which again would lead to social unrest; something that would wipe out any gains due to social upheaval.

In the calculations of many economists and social academics, it is China’s extraordinary growth that may incur a ‘hard landing’ when it expires. So a period of stability(~2%) allows the economy to stabilize and ‘mature’ on the growth cycles without wild fluctuations.

So, now is the time to ‘spend’ on the seed corn and prepare the country for the next round, instead of trying to ‘push’ GDP just because it looks better on the balance sheet. Infrastructure spending creating ‘internal opportunity’ may not be the sexiest economic measurement, but the ‘next phase’ of growth will depend on the success of infrastructure developments.

If Brazil is able to ‘capitalize’ on its social and infrastructure spending, which will be evident by the time of the Rio Olympics, and the ‘world economy’ stabilizes, then Brazil will be well situated to catch the next ‘growth phase’. So, a little anemic growth consistent with ‘world averages’ right now, is manageable, and ‘necessary’ to smooth the transition, and concentrate on efficiency(education) and productivity(infrastructure).

It is unnecessary really to point out that this is in stark contrast to the US over the last decade, when growth was ‘only’ characterized by GDP, and the bottom half of the society actually lost ground, and now finds very few avenues to ‘individual growth’. This has not fully played out yet for the US, but the impetus for unrest(OWS), labor dissatisfaction, and other social problems is very real. I.e., growth that is lop-sided, uneven, and perceived as unfair, does more to drag the economy down with bloated social spending …the European Disaster(yet to be extinguished).

So, no tears for Brazil. Competent management will always overcome and outlast speedy/uncontrolled growth. I always give the example of SiemensAG(Germany); one of the bulwarks of the German economy which went many many years at constant 2% growth, but the corporate management and infrastructure spending gave strength and ‘endurance’ to the “bottom line”, and ‘that’ does not appear on the ledger, but is intrinsic to long-term prosperity.

Posted by llocat333 | Report as abusive

So the corporations came in and “invested”, creating massive growth for a time while the resources were being mined. Now the growth is over and stagnation has set in due to not being able to compete globally. Get ready for the rich to get richer and the middle class to disappear into poverty when corporations get “streamlined” for profits. In a global economy where corporations have no loyalty to anything but the $ and can easily move productions anywhere else, it is natural that the 1st world and 3rd world will have a mass leveling and meet together in the middle. I would view .6% growth as sustainable and a good thing.

Posted by LysanderTucker | Report as abusive

Both India and Brazil need the same therapy of reforms in education, taxes, governance, investment in infrastructure and eradication of corruption. It would be wrong to assume that development will automatically take care of these. There has to be concerted and sincere action to address these issues.

Posted by Prabuddha | Report as abusive

Brazil and India (I can’t speak for China and Russia) are two countries where I have spent much time on business.

Problem is they have believed the BRIC mythology. In other words, business performance there is mediocre, but everyone thinks it is great. Except for bright spots in each country (software in India and resources in Brazil) business there is terrible.

Everything is slow and inefficient, except for some of the very hardworking middle class everyone is always taking off for one or other holiday, granny’s death, aunt’s party of preparation for marriage (to be fair the marriage thing is more India).

It is impossible to get business permits and finance and after several years of trying to expand businesses in these two regions we gave up concluding that at least the B_I_ in BRIC are simply products of the fevered imagination of the investment community desperate to maintain business after the US debacle.

Posted by eleno | Report as abusive