This year, the country didn’t deliver on everything international observers thought the country had promised, but Brazil still remains one of the 21st century’s most remarkable success stories. 2013 could be decisive.

For those paying attention to Brazil headlines, 2012 was mostly a bad year. For some, it was enough to re-evaluate the status as an emerging power that the country has euphorically held for years now.

The economy barely grew, and government involvement in the economy has surprised some international investors. The ruling Worker’s Party was dragged through the mud repeatedly as the Supreme Court handed down sentence after sentence for a vote-buying scandal from Lula’s first term. The PCC returned to the scene in São Paulo, and a small-scale war broke out between police and the gang. New laws dismayed environmentalists concerned for the Amazon.

But Brazil still remains one of the most remarkable success stories of the 21st century. This is true for a few simple reasons. 40 million people have risen out of poverty, and inequality has decreased. Despite the slowdown, unemployment is at record lows, and wages have continued to rise. Perhaps most importantly, we saw last week that President Dilma has an eye-popping 78 percent approval rating.

In short, the vast majority of the population support the way the country is being run, people are better off than ever, and society is more just. It’s important to remember that this is the whole point of economic growth and democracy in the first place. The results are there. We shouldn’t confuse means with ends, as is so easy to do when we journalists get caught up in the latest GDP numbers, or scandal.

Even some of the the year’s worst stories have a positive flip-side. As ugly as the corruption trial was, many believe that the tough sentences handed down to high-level politicians could signal an end to political impunity in the country. And despite the tragedy of a spike in violence in São Paulo’s periphery, the state’s murder rate is still much lower than it was a few years ago.

When Brazilians and observers (justifiably) complain about the country at the moment, a little context can be uplifting. What has the world been going through for the last 12 years, especially since 2007? How many countries in the world can you point to with: rising standards of living, reduced inequality, and widespread, long-lasting contentment with leadership? This is certainly not how things feel in my native California, or in Europe. And all of this in an open, liberal democracy? I can’t think of many examples.

But of course, nothing guarantees this will continue, and 2013 could be a decisive year. We can’t expect wages to rise forever without economic growth returning, and so the world will be holding their breath until it does, as expected next year.  But if instead there is more stagnation, or more of what the international community sees as state meddling in the economy, international investors could finally give up and concentrate on countries like Mexico or Colombia. And it’s hard to imagine how the PT would be seen by the people if any of the party’s social gains were reversed.

I personally don’t think either of those doom scenarios will come to pass. We’ll see. But for now, here are some of the bad, the good, and the interesting stories from 2012.

These are summaries – click the links for more in-depth info.

The bad

Corruption –

We watched all year as high-level politician after high-level politician was brought down for the ‘mensalão’ scandal from 2003, and a new hero of the opposition (and anti-corruption movements) was born in the form of Joaquim Barbosa (pictured above).

Violence –

War broke out for the first since 2006 in São Paulo. Again, the major parties were the PCC, the state’s main gang, and the military police. The latter lost over 100 officers to (mostly) targeted executions, while the murder rate in SP jumped.

The economy –

This is the big one. After growing 7.5% in 2010 (and causing us in the international press to rush here), then slowing to 2.7% in 2011, we may not do much better than 1% in 2012. Even more awkward was the moment when Finance Minister Guido Mantega joined the rest of analysts in wildly overestimating third-quarter growth, leading The Economist to call for his dismissal. Needless to say, President Dilma was not pleased to hear this from the British magazine.

But the economy is expected to pick up in 2013, thanks not only in part to the huge cut in interest rates carried out this year, which have finally come down to the levels of a normal country. And in reality, the 7.5% growth year was a statistical blip after -0.3% in crisis-hit 2009. Taken together, the economy had been growing at 3.6% a year, close to the average over the last 20 years, and to what we’re likely to see over the next few years.

But more worrying is that some investors believe, whether rightly or wrongly, that the government has begun to micro-manage the economy and that the possibility of intervention may be unpredictable. Much of this has to do with the decision to lower energy prices. I personally think they’re wrong, or at least that this was a problem of the government’s way of communicating the changes rather than the changes themselves. But some people are on edge, and this is especially important, as a drop in investment is the real culprit for the bad numbers.

And of course, there remains so much that Brazil should and could do to increase productivity and upgrade its growth model.

Infrastructure –

We are still waiting on this one. This is one part of Brazil’s economy that most desperately needs to be resolved, and we’ve still only seen baby steps.

The environment –

My visit to the Amazon this year was not pretty, both because of the persistence of slave labor and the obvious destruction of the rain forest. Things took a turn for the depressing for environmental activists as the government rolled back protections in 2012.

The good

Politics –

Whatever you think of the ruling Worker’s Party (PT), it is undeniable that if you use the standard most often applied to political parties, Lula and Dilma’s have overseen a truly remarkable success story since 2003. Lula left office one of the most popular leaders in the world, and two years into her term, Dilma is already widely supported. 78 per cent approval is a breathtaking figure. And this after everything that happened in 2012.

Despite the mensalão mess, the PT did very well in municipal elections this year, and took back São Paulo, South America’s largest city. If 2014 elections were held today, all polls indicate Dilma would win by a landslide.

And without a doubt, the country plays a much larger role on the world stage than it did in 2002.

The PT, like everyone else, could improve greatly, but widespread support and a rising nation means you are winning, big. This is a tough act to follow.

The real economy –

As I mentioned above, for all the dismal numbers, life on the ground still feels better than ever. Families are still rising out of poverty. The explanation for this is a little complicated, but the reality is there. It can’t last forever like this, of course, but forever hasn’t happened yet.

Justice –

The flip side to the mensalão mess is a justice system which really has teeth for the first time anyone can remember. This has always been the case for the poor, but now politicians can be on the hook, too. This has many hoping they will think twice in the future.

Even some police are being held to account. Some of those that gunned down suspected members of the PCC and, by all accounts, set off this year’s wave of violence, are now in jail.

World Cup preparations –

For years we wondered if Brazil would be ready to host the World Cup. We haven’t sorted out our infrastructure problems, but it looks like at least the stadiums will be ready.

My personal take is the following: The World Cup will go the way Brazil does for most visitors. Something or another will go wrong. They’ll be stuck in traffic, or miss a flight, or end up spending more than they expected on this or that. But those things will be heavily outweighed by the charm of the country and the fun of the event, and most will go home raving about Brazil.

Cost of living –

For us foreigners, it’s been good news that the real has come down significantly this year. Brazil is no longer so maddeningly expensive. For Brazilians, the cost of living hasn’t changed much.

Corinthians –

“The people’s team” from São Paulo took the world club championship, and gave Brazilian football a much-needed boost. This also meant lots of traffic and nonstop fireworks in the city, but overall it was very good for the country, and for South America.

The unexpected and interesting

Lula back on the scene –

I suppose it was more of an anomaly that he was actually gone for a while. But after recovering quickly from cancer, the former president was given a grand welcome back and got to work quickly, helping out in this year’s municipal elections. Crucially, he has so far floated above the mess of the mensalão scandal, and insisting he know nothing of the scheme. We’ll see if he can keep this up in 2013.

Music –

2012 was a much more interesting year musically than 2011, in my opinion. We saw the rise of Brazilian hip hop to the mainstream, “techno brega” from the Amazon in the form of Gaby Amarantos, and funky pop from the likes of Tulipa Ruiz. Here’s our full interview with Emicida, and Criolo’s will be posted next year.

Eike Batista –

He did not have a good year. There was the unfortunate incident with his son, Thor. Then he attracted lots of negative attention, and fell quite dramatically from his position as Brazil’s richest man.

Race –

Hard to categorize this one as good or bad, but the country stared two deep-seated problems in the face this year: relations with indigenous populations, and the government’s approach to black Brazilians.

Tourism –

The sector is doing quite well, but it has nothing to do with the gringos. The sector is almost entirely powered by Brazilians moving around their own country.

The rebirth of the center –

Long more famous for being “Crack land” than anything else, we saw interesting new movements coming up from the street.

Evangelical power –

Much to the dismay of bien-pensant liberals, Brazil’s numerous, and often unsettling, Evangelical Christian churches revealed themselves as an ever more potent political force.

Exhibitionist turn –

We saw Brazil’s sub-celebrity realitytainment industry power into the same bizarre gears we’ve been accustomed to around the world. First, there was the sex, or perhaps rape, transmitted live on Big Brother Brasil. Then we had the young girl who auctioned off her virginity for $800,000.

Petrobras – Graça Foster –

One of South America’s largest companies inherited a true rags-to-riches story as Graça Foster took over. Here’s hoping she can help navigate Petrobras out of its current mess.

Niemeyer –

And finally, we bid a sad farewell to nation-defining visionary architect Oscar Niemeyer, who passed at 104 years old. Here’s an interview I did with him last year, and perhaps next year I’ll post my pictures from his 104^th birthday party.

Here’s hoping 2013 goes better. Happy New Year.

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In this profile I did for the Los Angeles Times, sources explain that his catastrophic losses this year were in part related to his, erm, shall we say, unique personality. Much about the way he behaves will shock English-speaking readers, and the way he promised investors more than he could deliver led the markets to punish him severely.

His losses were far worse than anything else going on in Brazil. It is him, and not the economy more generally, that really tanked. The current wisdom is that Brazil will probably re-balance to more modest but decent growth, and that Eike’s companies will probably do OK eventually.

The problem, however, is that he quite purposefully and forcefully made himself a symbol of Brazil’s success. And not just the long-term opportunities for natural resource extraction he represents. His getting REALLY RICH, RIGHT NOW became a goal in itself, and, the myth went, proof of Brazil’s worth. That never made much sense.

Continue reading “In Brazil, a billionaire’s reality check” at the Los Angeles Times

Over lunch recently, a high-ranking executive gave me a strikingly obvious bit of off-the-record advice: “There might be a day when the Chinese stop building so much with steel, but there will not come a day when the Chinese stop eating.”

China is the most important consumer of Brazilian goods, and that is not likely to change anytime soon. At the moment, Brazil’s #1 export is iron ore, #2 is oil, and #3 is soya. But economists argue China needs to shift from a construction-heavy model to one based more around consumption. It’s also clear that Brazil’s potential to develop its arable land is enormous, and that the country could become one of the world’s breadbaskets.

Earlier this month, I reported on some more bits of good news for the agricultural sector in this piece in the Financial Times.

Click here to keep reading, “Brazil: soya bonanza” at the Financial Times.

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Of course on an economic level, this will get the country absolutely nowhere. Though Obama was likely telling the truth when he said he understood Brazil’s concerns, he has plenty of his own. Unfortunately, on the list of considerations that end up dictating US monetary policy, the President’s relationship with Brazil may not be in the top 50.

But politics is about politics, and naming and shaming the US may be worthwhile sometimes. It was indeed the US that caused the financial crisis, and reminding them that the rest of the world suffers as a result could be good for diplomatic leverage.

Back at home, what can be done to save Brazilian manufacturing? What should be done? Fears about the death of industry have become the main political and economic concern in Brazil recently – I explored this issue quickly in the LA Times after workers took the streets last week – but opinion is divided.

Amongst economists, business leaders and government officials, there are three basic schools of thought.

1. Brazil’s manufacturing sector is fundamental to the country, and world-class. If it weren’t for unfair and unexpected developments coming from the US, China, and Europe, we’d be doing fine, and something needs to be done to combat those countries.

2. Brazil’s manufacturing sector is fundamental to the country. But despite the problems caused by the value of the dollar, the real problem is a lack of competitiveness, and the government needs to undertake radical reform to reduce costs in Brazil.

3. Forget it. Brazil doesn’t need to export manufactured products, and even if it did, long-term economic trends will make it impossible. Brazil should focus on managing the transition to a natural resources economy. That doesn’t have to be so bad, they say. Australia and Norway have managed quite well.

Position one is held by the government and by representatives of the industrial sectors. This is especially true if you judge them by their actions rather than their words. Both Dilma and market leaders do agree that reform is necessary, but actually trying to do it has so far been out of reach. It would be costly and politically difficult to improve infrastructure, reform the tax code, and adjust government expenses. What we’ve seen instead is the currency war and a set of stimulus packages for the struggling sectors.

Position two is held by some economists and business leaders that you might say belong to the “development” school. Brazil should be very worried about trying to exist on basic goods alone – the country worked very hard to overcome dependency on selling commodities, and we shouldn’t let that slip away. The government should do all that is possible, including everything listed above, to save the sectors.

Position three is held by a surprising amount of serious commentators, who might be called the “free market” or “comparative advantage” school. Yes, reform is needed all around, they say, but things will be getting even tougher for industrialists. In the long term, the dollar will drop more and more, and the pre-salt reserves will only exaggerate the circumstances in favor of commodities producers. History is not on your side. Deal with it and move on. Unsurprisingly, the fact that serious people even think this does not please either the government or most business leaders.

When Dilma gets back, this will be the debate she will be wading through for probably the rest of her presidency.

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Neither Thor nor Eike denied that the 20-year old’s Mercedes-Benz SLR McLaren struck 30-year old Wanderson Pereira da Silva at high speed, killing him instantly. But both took to social networks to proclaim Thor was not at fault.

Now, it looks like the heir-apparent to the $30bn empire will not face any criminal charges, and that empire has just gotten a very welcome cash injection from a friendly sheikh in the Gulf. Mubadala, an investment arm of the Abu Dhabi government, will drop $2bn into EBX, Eike Batista’s group.

Mr. Batista has gotten very, very rich off of publicly floated plans to develop Brazil’s oil, gas and mineral resources, and has recently expanded into hospitality, real estate, technology, and beauty companies.

But so far, few of his businesses have actually made any real profits. This makes the new deal especially important for him.

As the FT’s Beyondbrics reports:

Mubadala’s $2bn investment in the EBX holding company itself is a big vote of confidence. As Batista said himself in an interview with beyondbrics, “it brings branding by a strategic investor who is internationally known”. But more importantly, it means Batista can choose to spread the cash across his various businesses without losing any operational control.

Batista is quite a character. His father was head of Vale, Brazil’s most important mining company. After Eike made his own billions, he has often surprised the foreign correspondents who interview him by showing off the Mercedes he keeps parked in his living room, openly proclaiming he will soon be the world’s richest man, or taking them for a helicopter ride.

Such a man understandably divides opinion. Some praise him as proof that private sector entrepreneurship and the pursuit of wealth bring benefits to Brazil, and have made his book, “The X Factor“, a best-seller. Others see his bragging as very poor taste in a country still facing widespread poverty. And the financial crowd has often questioned when his companies will actually make money.

But after a rough spot, the Brazilian legal system and Arab money have stepped in to help him out, and Eike is on top again.

Links:
Why has Brazil been getting richer?
FT Beyondbrics – Batista gets a new friend from the Gulf

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If you are reading this blog, it is likely you’ve heard that Brazil has been doing quite well. Over the last decade, the country has powered forward, pulling tens of millions out of poverty, and has just now overtaken the United Kingdom to be the world’s sixth-largest economy.

Why? Why is Brazil chugging along as much of the rest of the world writhes in crisis? Of course the complete answer lies in the complex interactions of 190m people. But let’s not neglect the benefits of oversimplification.

So then, there are two major causes behind the growth: sales of commodities to Asia, and the benefits of fixing the financial system. In the former case, Chinese demand pushed up the prices of Brazilian goods, especially iron ore and soya. In the latter, the domestic economy is ‘catching up’ to where it probably should have been years ago. This was very much the consequence of fixing hyperinflation and creating sound financial regulations.

Building and feeding China

It’s no secret that China has been powering world growth for some time now, and is operating at a completely different level than the US and Europe. So it was quite fortuitous that Brazil slowly began strengthening its trade relationship with China in the twenty-first century, until China eventually overtook Brazil’s traditional trading partner, the US. Countries like Mexico that remain closely tied to the US have had a much different experience over the last few years. Much worse, that is.

China is growing quickly, but it’s a very poor country. So they have seen growing demand for basic things like steel to expand their cities, and for food staples. For Brazil, which has large quantities of high-quality iron ore, and a large, fertile breadbasket to produce soy beans, this has worked out quite well. The shift in focus has been remarkable. Since 2000, Brazilian exports to China have increased by more than forty times.

Of course, this has generated some legitimate concerns that Brazil could be ‘de-industrializing’, and could put itself at risk by concentrating too much on exporting basic goods. But for better or for worse this now powers the country’s international trade. And next, oil will be stepping onto the scene in a big way.

Hyperinflation and return to normality

In the 1980s and 1990s, Brazilian money was not a reliable store of value. Some level of inflation is not always a problem, but here it got completely out of control, at times rising by more than 2,000% a year. This had widespread implications: saving made no sense, credit was basically impossible to acquire for normal people, and only the rich could use complex financial machinations to stay above water.

The struggle to end hyperinflation explains much of the modern political economy of Brazil. To oversimplify again, the return to macroeconomic stability started under the rule of Fernando Henrique Cardoso and was continued under President Lula. It worked, but left Brazil with some of the highest interest rates in the world.

During Lula’s two terms, the belief gradually set in that stability might be here again to stay, leading to an expansion in investments. Then Lehman Brothers fell.

No crisis, more credit

Remarkably, Brazil had basically no financial crisis in 2008. This was because a history of crisis had ensured extremely sound financial regulations. None of the nonsense that was going in New York or London. In the wake of the global crisis, two things happened that made Brazil’s growth appear even more impressive.

First, the Lula government was able to use Banco do Brasil to expand credit in the economy and provide a strong stimulus to avoid recession. Remember the bitter and failed conversations in the US and Europe about ‘trying to get the banks to lend’? Well, Brazil simply controls one of the major banks, so the government just made it happen. (This also proved very profitable for the bank.) And since Brazil already had very low levels of credit in the economy, it could actually healthily expand debt levels while the rest of the world began to ‘deleverage’. This caused a bottom-up consumer boom, of a new middle class being able to buy things like refrigerators, ovens or cars. Yes, they often did so at usurious levels of interest, but that’s how it happened.

Second, interest rates in the US and Europe dropped to zero. Here, they were still sky-high. This meant that lots of capital that could get no returns in the rich countries could be invested here for a profit. So a flood of money came into Brazil. But there are also negative consequences: the Brazilian currency is now extremely over-valued and the country is very expensive. But that’s how it happened, broadly speaking.

Still not rich

Brazil may now be the world’s sixth-largest economy. But it is the world’s 5th largest country by population. There are a lot of people. If you divide GDP per capita, here is where Brazil comes up in the list of the world’s 180 countries:

Source: Imf data for 2011, on Wikipedia, using PPP*

Brazil does a little bit better using nominal prices*, though not much

There is a big difference between growth and wealth. Growth, which China and Brazil have, makes people better off than they were last year, generates returns for investors (both at home and abroad) and often feels nice. Wealth means you have a lot of stuff, but that things can still be rough if you’re in crisis – as is the case now in Europe, despite being almost four times as rich as Brazil.

*(Basically, PPP means what it feels like if you live here, and nominal is how much stuff you can buy on the international market)

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