The City Herald

Long seen as a business dead spot in Latin America, Brazil is now rising as an important economic and political power. Yet it has many hurdles to overcome

For a long period in history, Brazil’s image worldwide was limited to a handful of stereotypes. The country was portrayed either as cheerful people dancing samba, the land of the Amazon forest and talented soccer players, or as a place of drug dealing, poverty and brutal violence.

This picture however, has begun to change. Several political and economic factors are contributing to reshape the Brazil’s international image, giving the South American giant new credibility in the global arena. The privilege of holding the 2014 World Cup and the 2016 Olympic Games are timely examples of this shift. “Brazil is really living a magical moment”, said President Luis Inácio Lula da Silva to the Financial Times recently.

Despite a stigma of underperformance and self-doubt, Brazil is now thriving. As one of the last countries to endure the consequences of the global crisis, it was one of the first to emerge from recession. It is also gaining relevance within global institutions, such as the G-20.

This new role derives from changes carried out during the past two decades, which gave the country more credibility nationally and internationally. One of its biggest achievements was the Plano Real (Real Plan), implemented by former President Fernando Henrique Cardoso in 1994. It effectively tamed inflation and brought in strict economic policies that guaranteed lasting stability. As a consequence, interest rates plummeted from 29 percent in 1998 to current 8.75 percent.

This strategy has been maintained by Mr Lula and enhanced by a massive program of income transfer (Bolsa Família), which distributes allowances of up to R$200 ($115) to 11 million poor families every month. Together with low inflation rates, the Bolsa Família had helped to reduce poverty from 39 percent to 25 percent of the population since 2003, according to the government’s Institute of Applied Economic Research (IPEA). Extreme poverty had also dropped to below 9 percent.

Fortune also played a part. Brazil has benefited from favorable external conditions, particularly by the increasing international demand for commodities in last decade (especially from China). In 2008, exports hit $198 billion, triple the amount registered ten years back. Moreover, its foreign reserves skyrocketed to $230 billion – five times greater than 2004 – transforming Brazil from a penniless client of the International Monetary Fund (IMF) to a contributor.

The government has also begun to diversify its trade partners, seeking new agreements in Asia, Africa and the Middle East. The pursuit of a “be friends with everyone” policy – a trademark of Mr Lula’s administration – was a successful one, at least in economic terms. In 2008, China became Brazil’s biggest trading partner, surpassing the United States. Brazil and Iran have also recently signed a new trade agreement.

Despite exciting prospects, Brazil remains one of the worst performers in terms of real GDP growth amongst the BRIC. (The acronym stands for Brazil, Russia, India and China. It is the group of developing countries that according to investment bank Goldman Sachs, will collectively dominate the global economy by 2050.) An average growth rate of 3.3 percent during the past four years left some questioning the relevance of the letter B in BRIC.

In many ways, Brazil is the most stable country of the BRIC block. Unlike China and Russia, it has an established and stable democracy. Unlike India, Brazil has no serious disputes with its neighbors. It is also the richest in terms of GDP per capita, and the most urbanized, which partly explains the lower growth rates.

Yet several barriers prevent Brazil from attracting more businesses and boost prosperity. Although it is the 8^th largest economy in the world, it ranked only 56^th on the “Global Competitiveness Index 2009” issued by the World Economic Forum (WEF), behind India (49^th) and China (29^th).

Brazil’s struggle to attract more investments in the global market is related to structural problems. Particularly, the government needs to restructure and improve service in the public sector. The Heritage Foundation’s “Economic Free Index 2009”, which measures the overall environment for setting up a business in 183 countries, downgraded South America’s leading economy from “moderately free” to “mostly unfree”.

The report highlights that the state remains heavily present in many areas of the economy. People who want to start, run or close a business are subject to Brazil’s archaic legislation, high credit costs and frequent regulatory changes. Moreover, the process of opening a new company almost four times as long as the world average of 38 days. Terminating a business can be an equally painful road.

In recent years, government spending reached 40.7 percent of GDP. The income is mainly spent on pensions, transfers to local states and municipalities and extensive bureaucracy. Foreign Direct Investment (FDI) in Brazil has significantly increased over the past two decades, making it the leading recipient country of international capital in Latin America. Its expanding domestic market, abundant natural resources and relative openness to investments play a big role in attracting transnational companies.

The growth of FDI began in the late 1990s and was largely a product of privatization of state companies that took place until 2002. It wasn’t until 2004 that foreign investors started to acquire privately owned companies. One of the most notable deals is the merger between Brazilian beverage company Ambev and Belgian Interbrew for $1.3 billion.

“The Brazil Competitiveness Report 2009”, another study published by the WEF, underscores the good image Brazil has with international investors. UNCTAD’s World Investment Prospects Survey (WIPS), mentioned in the report, found that Brazil is the 5^th most preferred location for international investments among company managers. “The richness in natural resources displayed by the country makes it very attractive for resources-seeking export-oriented FDI”, says the report.

Liberalization transformed Brazil into an agricultural superpower. The country is today the world’s biggest exporter of beef, chicken, orange juice, green coffee, sugar, ethanol, tobacco and soya. Brazil is the third largest agricultural exporter in the world and a major seller of mineral commodities. Petrobras, the state-controlled oil company, and Vale, a global mining company, together account for more than 30 percent of Bovespa’s (the Brazilian stock exchange) market value.

Despite these achievements, Brazil still has big hurdles to overcome. Almost 80 percent of cargo heading to the export port of Santos, faces a treacherous journey over miserably kept roads. Ships must wait for high tide to leave the port, since the channel out is two meters shallower than it should. Transportation costs alone account for nearly 13 percent of the country’s GDP (five percentage points more than in the United States).

The recent cycle of economic growth has also shed light on the inadequacy of education in Brazil. An OECD report comparing 15-year-olds’ abilities in reading, math and science ranked Brazil fairly low. As a consequence of the poor level of education, universities are not producing students with the skills demanded by transnational companies. “Human capital … appears to be a critical bottleneck to Brazil’s entry in the knowledge economy”, says a 2007 report by the World Bank.