Brazil has just passed the United Kingdom to become the sixth-largest economy in the world. Only a decade ago such news would have been written off as just another version of the old joke, “Brazil is the country of the future, and always will be.”
Today, the land of sun, samba and soccer is defying predictions of global gloom. Foreign direct investment is pouring in – $48.4 billion in 2010, more than twice Australia’s $23.4 billion – and the government’s anti-poverty policies are pulling millions out of misery. How did this happen?
Ten years ago, Brazilian economist André Lara Resende, one of the architects behind the real plan that stabilised the country’s economy in 1994, gave a chilling presentation in Oxford. He described the economic task of the newly elected government of President Luis Inacio Lula da Silva as like inching down a knife’s edge. The tiniest policy slip or simple bad luck would skewer Brazil and risk another decade of hyper-inflation and chronic bankruptcy.
Two things happened that saved Brazil. First, Lula turned away form his radical rhetoric and towards pragmatic economic policy. Almost nothing changed in the economic ministries during the transition from the centre-right Fernando Henrique Cardoso presidency to the leftist Lula regime.
Shortly after his election, Lula announced that his government would run a 4.25% of GDP primary fiscal surplus, a full 1.25% higher than required by the existing IMF standby agreement. When the surplus was effectively reduced to 3.75% in 2007, it was done with a clever pro-growth policy shift that IMF would adopt and apply elsewhere.
Maintaining the high primary fiscal surplus would not have been transformative in itself if Brazil’s economy had not exploded into life – an event that can almost be written off as dumb luck. The Brazilian government had nothing to do with the early 21st century surge in agricultural and mineral commodity prices. In fact, failures to reform tax systems and upgrade transportation infrastructure nearly prevented Brazil from reaping the gains of the commodity boom.
By the time Lula was settling into his second term in office, the discovery of gigantic oil reserves off the coast of Rio de Janeiro and São Paulo states added additional fuel to Brazil’s roaring engine and private investment began to work around some of the logistical logjams.
In this respect, this story is not terribly different to Australia’s experience – sound fiscal management combined with a China-driven resources boom have brought about surging economic growth and rising prosperity.
Where the Brazilian story differs is how the government has exploited these opportunities and taken an active approach to industrial planning and national development to secure the future.
Brazil’s economy is dominated by a handful of major companies. Of particular importance are the oil company Petrobras, which is 51% state-controlled, and mining giant Vale, which is formally a private company but is nevertheless still heavily influenced by the state through a web of government and pension fund shareholdings.
Those companies not heavily influenced by government-managed equity stakes are “guided” by the requisites of accessing affordable financing through the mammoth National Bank for Economic and Social Development (BNDES), which loaned $US79 billion in 2011 and is still the only viable source of long-term financing in Brazil.
The government has clear national industrial and development policy objectives which business disregards at its peril. In 2011, Finance Minister Guido Mantega used government-controlled shares to orchestrate a boardroom coup to effectively fire the tremendously successful Vale CEO Roger Agnelli. What was CEO’s crime? During the global financial crisis he implemented a temporary workforce reduction, which Lula bitterly opposed.
The government’s influence is visible even in cases where it lacks the power of an equity stake. Mining tycoon Eike Batista apparently backed down from consistent criticism of government policy when access to BNDES financing became difficult. Brazil’s major construction firms are careful to keep good relations with the government and the BNDES to support their infrastructure contract bids in Africa and Latin America.
Although this looks like industrial nationalisation in disguise, these events are the outliers in a national political economy that might be negotiating a genuine “third way”.
Profit remains critical because the tax revenues and dividends fund the national social programs that create political support. Stunningly successful poverty-reduction initiatives, such as the conditional cash transfer program Bolsa Família, are complemented by clear direction to Brazilian firms that they should prioritise national suppliers and hire domestic employees, even if this is not the most immediately price competitive option. This reduces profit margins in the short term, but opens up new medium-term and long-term opportunities supported by the government shareholder.
Brazil’s economy is thus a complex game of government and corporate interests negotiating mutually beneficial outcomes. Firms push for sustainable profitability and the government seeks to advance national developmental objectives. So far the mix has proven magical. An estimated 39.5 million Brazilians have moved to the middle class and it is possible that extreme poverty will disappear sometime this decade.
But, like Australia, the success is founded upon commodities, and the Brazilian miracle still has to sort out its growing shortage of skilled professionals and technicians. Whether Brazil really will finally reach its future depends on addressing this human resources challenge and managing the eventual slackening of global commodities appetite.