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Back to Brazil: 'The Country of the Future'

Posted By Guy Pfeffermann, Tuesday, October 23, 2012

Guy PfeffermannBrazil is a very important country. In surface it is in the same league as Canada, the United States and China, surpassed only by Russia. In population (about 200 million), it also ranks # 5 worldwide. In economic size, it is roughly similar to the UK and France, whose GDPs are surpassed only by the US, China and Japan. Brazil, as the saying goes, "is the country of the future, and always will be”. The implication is that nothing ever changes much in Brazil. Having spent a week in Sao Paulo, Belo Horizonte and Rio, I can assure you that Brazil has changed in very important ways over the last 10-20 years. In other ways, it has not.

I had the pleasure of meeting my friend Edmar Bacha again after about 10 years. Edmar, who runs a Rio think tank (http://www.iepecdg.com/), famously characterized Brazil as "Belindia” back in 1974: a country in which a small minority of the population was living like people in advanced modern economies such as Belgium, the vast majority like low-income people in India. Ten years ago, former Planning Minister Delfim Neto came up with another humorous epigram for Brazil, this time Enghana: Brazil, as he saw it, had the (then extremely high) taxation level of England, but these government revenues were used to deliver social services at par with Ghanaian standards (much lower then than today). In a further twist, the Portuguese word enganar means to trick or hoodwink (taxpayers).

So, what happened to Belindia and Enghana ?

From inception, the Belindia metaphor deliberately exaggerated the separation between low-income people and others, but it was a striking "bumper sticker” for Brazil’s extreme income inequality. A common way to measure income inequality is the Gini coefficient. If everyone in a country had the same income, the Gini coefficient would be zero. If one hypothetical person earned almost the entire income of a country, the Gini coefficient would be 1. Historically, Brazil’s income inequality was among the highest in the world, hovering around 0.6. This was true until about ten years ago, when inequality began to decline year after year and is now around 0.55. In contrast, China’s Gini coefficient increased from 0.37 in 1997 to 0.52 in 2010, neck-and-neck with Brazil. In the United States as well, the Gini coefficient rose from 0.44 around 1985-1990 to close to 0.5 since 1995 (the after tax US Gini moved from 0.35 to 0.38). Since relatively few pay income taxes in Brazil and China, it is fair to compare their pre-tax Gini coefficients to the post-tax coefficient in advanced economies, where most people pay income taxes. Another way to look at Brazil’s remarkable evolution is the share of the middle-class, broadly defined, which rose from around 30 percent of the population in the early 1990s to 55 percent last year.

I apologize for this somewhat technical paragraph, but it shows how Brazil’s inequality trend was reversed during the past ten years. This has not happened in the United States since the post war impact of Roosevelt’s GI-bill, which propelled an enormous cohort up the economic ladder.

In fact, Brazil is bucking a worldwide trend, as globalization has brought with it widening income disparities.

How did this happen? My answer is: Brazilians were lucky to have elected two outstanding presidents – Fernando Henrique Cardoso and Luis Lula da Silva. Cardoso managed to curb Brazil’s perennial inflation, a hugely "pro-poor” policy, as poor families live on cash, which melts away by the day, while more affluent families live on plastic and have other ways of hedging.

Furthermore, today consumer credit is serving low-to-middle income families; indeed, there is a consumption boom among low-to-middle income populations. Besides helping increase the buying power of low-income families, curbing inflation also lifted the fog that surrounded economic decision-making, reduced transaction costs, and generally enhanced confidence.

Second, and building on Cardoso’s immense achievement, Lula’s administration expanded social services and other government support to hitherto underserved sections of the population. Brazil recorded the steepest increase in education expenditure of all but one of OECD’s 38 countries (from 3.7 percent of GDP in 1995 – an abysmally low level – to 5.5 percent in 2009, almost matching the OECD average of 6.2 percent). Another important driver of social inclusion is the explosive growth of mobile communications; today there are 260 million mobile phones (plus 40 million land lines).

As to Enghana, the metaphor is alas still valid today.

The Government’s costly social benefits accrue to a minority, while taxes are among the highest in the world. For example, many Brazilians used to retire exceedingly early at near-full salary, then found second jobs (some actually managed to get re-hired in their old jobs). Between 1993 and 1998 the average retirement age went down from 54 to 49, and the number of private sector retirees receiving government pensions nearly doubled. The pensionable age has been raised since then, but a great many happy retirees live in Brazil, a financial burden on society.

Owing largely to opaque, often "cascading” taxes – that is: taxes on taxes on taxes – life in Brazil is very expensive. Brazil remains therefore a "raft economy” where a minority captures substantial social benefits, while the rest are swimming around the raft and paying heavy taxes. This huge drain on the government’s finances has diverted funding from badly-needed infrastructure upgrading. Sao Paulo’s international airport is much as it was twenty years ago. Brazil’s transport costs are notoriously high.

While school expenditure and coverage have increased, quality is very uneven and too many Brazilians are still only marginally literate.

The higher education system produces a fraction of the needed talent pool, notably far too few engineers to meet needs. Brazil faces an enormous human resources problem. Petrobras’s hugely ambitious deep-sea oil and gas drilling program brings this to the fore. Relative to the economy’s size, it far exceeds the Manhattan Project’s to the US wartime economy. Consequently, tens of thousands of skilled immigrants move to Brazil each year.

Last, but not least, high protection against imports – a good brand-name Chinese radio costs three times what it does in Chile - depresses purchasing power.

Brazil has remained one of the world’s economies most isolated from the rest of the world. Its trade (imports plus exports) adds up to less than one-quarter of GDP, half of India’s ratio, and less than half of Russia’s and China’s. The vertical axis of the following picture shows trade as a percentage of GDP; the horizontal axis shows how the ratio evolved from 1988 to 2010.

BRICS - Trade as a percentage of GDP

Brazil (green) was overtaken during the century’s first decade by India (purple), which during that time caught up with China (red) and Russia (blue). Of the BRIC countries, only Russia has a lower share of manufactured exports in total exports (15 percent) than Brazil (37 percent). India’s is 64 percent, China’s 94 percent.

[Source: http://devdata.worldbank.org/TradeVisualizer/]

 

 

 

 

Owing to its massive endowment of fertile land and mineral resources, Brazil is today one of the world’s top exporters of soy beans, orange juice, iron ore and some other commodities. It has not, however, been successful in increasing the share of non-commodity exports, prices of which are far less volatile. The following graph shows the share of manufactured exports in total exports since 1988.

BRICs share of manufactured exports in total exports

Less than 40 percent of Brazil’s exports are manufactures, compared to 64 percent of India’s and more than 90 percent of China’s. Of the BRIC countries, only Russia, with a rate of 15 percent, is out-performed by Brazil.

 

 

 

 

 

 

 

In conclusion Brazil’s economy has been doing quite well thanks to a broadening of domestic demand across socio-economic strata; inflation has come down; banks are rock-solid; and an abundance of natural resources has propelled Brazil to the top of world commodity exporters.

However, the country’s enormous public sector soaks up far more resources from society than it produces in public goods, particularly modern education and physical infrastructure. Brazil will host the world soccer cup a year and a half from now, and the 2016 summer Olympics. Perhaps this looming challenge will generate the political will needed in order for Brazil truly to join the 21st century’s economy.

 

Guy Pfeffermann is the founder and CEO of the Global Business School Network, and the former Chief Economist of the IFC at the World Bank.

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