Country in Focus
Brazil: The Comeback Kid of South America
By Tong Yee Siong
Nov 1, 2006, 17:25

For the longest time, Brazilians have tortured themselves with the question of why their country can't prosper like the United States? After all, both dominate their respective halves of the Americas, are amply endowed with a huge population, and are blessed with ample land and natural resources.

Not anymore. Brazil is no longer seen as the under-achiever in South America. In recent years, things have turned around dramatically in Brazil. Its economy now makes up one-third of the region, and is the eighth largest in the world.

Brazil's prospects are so bright that even the recent political uncertainty could do little to diminish them. While President Luiz Inácio Lula da Silva of Brazil failed to win an outright majority in the October 1 presidential poll - leading to a surprise run-off election against the centre’s Geraldo Alckmin on October 29 - it is undeniable that Brazil has improved tremendously during the four years of Lula, as 176 million Brazilians simply call him, in office.

By international definitions, Brazil is today a middle-income rather than a poor country. Inflation is at its lowest level in decades. As the spending power of the poor has increased, the prices of many foods have actually fallen. And the government has introduced new forms of credit - payroll-linked lending, under which instalments are taken straight from the borrowers’ wage packets - in 2004, leading to strong growth in domestic consumption. Such stable economic conditions have enabled Brazil to register rapid economic expansion in recent years.

In 2001, investment bank Goldman Sachs coined the term BRICs for Brazil, Russia, India and China. It did so to call attention to the four countries’ potential for fast and sustained growth. By 2041, Goldman predicted, the four economies would be worth more than those of the US, Japan, Germany, the United Kingdom, France and Italy put together.
But things were not always rosy for Brazil.

Up to mid-1990s, stratospheric inflation rates had disrupted economic activity and discouraged foreign investment. Since then, tight monetary policy has brought inflation under control. Another big challenge for Brazil came in 1998, when, following Russia’s debt default, the Brazilian Real faced enormous pressure. Capital continued to leach out of the country amid concern about Brazil's debt and overvalued currency. The Real was subsequently devalued to make Brazil's exports more competitive.

Still, in retrospect, chief among the reasons that contributed to Brazil’s economy is rocketing global demand for its commodity exports - led by China, India and other fast-growing markets. At the same time, low international interest rates and a glut of liquidity have contributed to what is for Brazil an extraordinarily benign international environment.

Brazil is recording trade surpluses of more than US$40 billion a year, a factor that has allowed the country to pay off external debts. At the same time, the Real has gained about 65 per cent in value against the US dollar under the Lula administration, underpinning price stability and benefiting the poor.

Critics say favourable global conditions have contributed to a lack of urgency for Lula to follow up initial efforts to reform the public sector by trimming spending public-sector payrolls and pensions. While exports continue to rise, they are increasingly led by iron ore and other commodities with little or no added value, critics added. Meanwhile, thousands of companies in manufacturing sectors such as footwear and textiles have gone out of business because a strong currency has eroded their competitiveness in global market.

Be that as it may, barring a sudden downturn in the world economy which, in turn, weakens the insatiable hunger for raw materials, Brazil's dependence of its commodity exports seems likely to remain a feature of its economy over the medium term.

Agricultural modernisation
Under an agricultural modernisation programme, the Brazilian government poured money into investments that enable farmers and ranchers to operate more efficiently. In 1971, it established a research institute called Embrapa to pioneer innovative farming techniques. The government also encouraged the consolidation of inefficient 250-acre farms into enormous plots 10 to 50 times as large. Unlike countries like India and China, Brazil's farms were increasingly operated by large agribusinesses that chose to shift towards more diversified crops.

Agricultural exports soon began growing faster than the overall economy starting in the mid-1980s. From 1994 to 2004, Brazil's exports grew 8.7 per cent annually.

After nearly three decades of work, sugarcane is now one of the main crops in Brazil. Apart from being used as raw material for sugar, it has also become a cost-effective alternative to gasoline. For this reason, Brazil expects to become energy independent this year.

Ethanol now accounts for as much as 20 per cent of Brazil's transport fuel market. The country's use of gasoline has actually declined since the late 1970s, whereas the use of alternative fuels in the rest of the world is a scant 1 per cent. Brazil says its ethanol exports will likely double to US$1.3 billion in 2010 from US$600 million in 2005, largely to Japan and Sweden. These countries hope using ethanol - which releases less carbon dioxide than fossil fuels - will help them meet their obligations under the Kyoto Protocol to cut emissions.

Sugar, a staple in Brazil since Portuguese colonists planted it in the 16th century, is only one of the crops that make Brazil the world's emerging agricultural powerhouse. Thanks to virtually unlimited acreage, ideal weather conditions and advanced technology, Brazilian farmers are also No. 1 in exports of beef, coffee and orange juice, and are quickly climbing the charts on other commodities, such as soybeans. Aside from that, Brazil is one of the largest exporters of guavas, lemons, mangoes, passion fruit, tangerines and tobacco.

That success in world markets has given American farmers a powerful competitor and has given Brazil a seat at the table where global trading rules are written. In the ongoing “Doha Round,” Brazil and India lead a group of 20 developing nations seeking dramatic changes in the way crops are raised and traded. If there's to be a new trade pact, Brazil's demand for greater access to protected markets in rich countries must be satisfied.

Even so, Brazil's agricultural potential has yet to be fully exploited. The country is larger than the 48 lower states in the US, and today grows crops on only 19 per cent of its 790 million cultivable acres.

Going hand in hand with Brazil's agricultural modernisation is the improvement in its traditionally backward livestock industry. Apart from beef, the country is one of the largest exporters of poultry and swine sub sectors to countries, including many with a sizable Muslim population.

For example, when Egypt recently permitted for six months the import of frozen chicken, fresh and powdered eggs, and eliminated import tariffs on these products and on frozen cattle beef, fish and industrialised chicken - in anticipation of higher poultry consumption for the fasting month and the subsequent Aildil-Fitri celebration - Brazil quickly seized the opportunity and started exporting large volumes of chicken meat to the Egyptian market.

According to newspaper Al Ahram, the main paper in the African-Arab country, 20,000 tonnes of frozen chicken, produced in Brazil, arrived in Egypt on September 5. Each tonne exported costs on average US$ 2,000. Therefore, a shipment of 20,000 tonnes would have cost about US$40 million, representing around 19 per cent of Brazil's poultry revenue on the foreign market in the month of July.

Rich minerals
Adding to Brazil's fortune is its large reserves of important industrial metal minerals such as bauxite, Kaolin, iron ore, niobium and nickel. Brazil is also a major producer of several other key commodities such as gold, coal and phosphates. The minerals sector employs about 4 per cent of the total workforce (approximately 650,000) of Brazil.
Thus, soaring metal commodity prices in recent years are a welcomed development in Brazil. The recent windfall revenue from the mining sector is serving to entrench Brazil's presence in the international market further.

In August, Brazil's Cia. Vale do Rio Doce (CVRD), the world's largest iron ore miner, offered US$15.3 billion plus debt assumption for Canada-based miner Inco Ltd in a bid to become the planet's largest nickel producer. Currently the world's second-largest producer of nickel after Russia's Norilsk Nickel, Inco also mines and processes copper, gold, cobalt and platinum. CVRD's latest plan came at the heels of its earlier announcement that 80 per cent of its planned US$4.6 billion in new investment this year is linked to meeting China's demand. That spending would help create 20,000 new jobs, the company says.

All said, it's clear that Brazil's macroeconomic situation is driving the expansion. While Lula may not be the long-awaited Messiah for his people - some economists have constantly attributed the country's recent achievement to factors other than Lula's policies - there is still a real possibility that Lula may secure a fresh mandate and use that to push forward further reform that is demanded of him in his second and final term.

This will be necessary as the international economic environment will not remain clement forever. Moreover, foreign investors in recent years have claimed that Brazil's economy is being held back by high taxes and interest rates, which are largely a consequence of high and inflexible government spending.

Should Lula win, and succeed in his reform agenda, which leads to increased foreign investment tapping into the country's rich resources, Brazil's growth engine will continue to rev for quite some time to come, making it finally the true equivalent of the US in the Latin American world.




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