Not long ago, Brazil was riding high. It was feted as one of the “BRIC” nations destined to be the next world economic powers. The commodities boom had its natural resources and agricultural sectors humming. The press – for example, Monocle magazine’s swooning over Brazil’s push to boost its diplomatic presence – was adoring. And Rio was awarded the 2014 World Cup and the 2016 Olympics, two events that were intended to both serve as a catalyst for further development, and also as a coming out party of sorts for the country.
The World Cup is underway, but otherwise things haven’t quite worked out as Brazil thought they would. The average citizen of the country is upset at the vast sums being spent on international events that don’t benefit them. The last two years have featured riots, strikes, and various other expressions of unrest. Economic growth in the country has collapsed. In a special section last September, the Economist asked, “Has Brazil Blown It?”
Late last month the McKinsey Global Institute issued a major report on the country called “Connecting Brazil to the World: A Path to Inclusive Growth.” At 104 pages, it’s massive, but a must read for anybody interested in South America’s giant.
And it’s a somewhat depressing read as well. Though there are immense strengths and opportunities for the future, Brazil has big problems too, most of them longstanding, and which hobble its aspirations.
Brazil is the 7th largest economy in the world and the 7th leading destination for foreign direct investment. But it’s 95th in per capita GDP, 114th in the quality of its infrastructure, and 124th in its level of ease in trading across borders. Its export sector is also heavily commodity dependent, particularly oil. Ranked only 43rd in global connectedness on McKinsey’s index, they estimate a potential boost of 1.25% (presumably percentage points) to annual GDP growth from improvements on that measure alone.
Three particular items jumped out at me from the study. One is the “custo Brasil” – the Brazil cost, so notorious it gets its own Wikipedia entry. A variety of factors from bureaucracy to the tax regime to an uncertain legal climate, poor infrastructure, crime, and corruption make the cost of doing business in Brazil very pricey indeed.
The second is the very low rate of investment in the economy. Brazil’s gross investment rate as a percentage of GDP is 18%, compared with 26% in Chile, 29% in Mexico, 40% in India, and 49% in China. Conversely, government consumption is at 22% in Brazil vs. 12% in Chile and Mexico, 13% in India, and 14% in China. Private consumption is similar in the countries except for China, which is notably lower. This probably helps explain the poor state of the infrastructure in the country.
The third is something I have personal experience with, namely protectionist trade barriers designed to create and sustain domestic industries in sectors like autos and computers. I suspect these rules were modeled on Japan, and more lately China, which used rules and business practices to build successful local champions. But in Brazil this has rendered its industry sclerotic. In effect, cars sold in Brazil have to be made in Brazil, ditto for computers, etc. This is where my personal experience comes in. When we were doing global PC procurement, Brazil was always a special case and our vendors had to have special Brazil made PCs for domestic use. This may not be an actual rule, but tariffs produce a de facto barrier. While this technique may have worked in Japan, it’s clear that it failed in Brazil. As the exception that proves the rule, McKinsey uses the example of regional jet manufacturer Embraer as a counterfactual. That company was privatized and opened to global competition. The result is that its got tough itself and is now an industrial champion for Brazil.
There are tons of statistics in the study that are worth scanning just to see. Brazil is consistently benchmarked against Chile and Mexico in Latin America, as well as fellow BRICs India and China. The comparisons aren’t pretty.
Reading a lot about the country in the last year, I put its problems into three categories: poor governance, geographic disadvantage, and scale disadvantage.
1. Poor Governance
Most of the issues pointed out by McKinsey fall squarely under the heading of poor governance. The contrast with nearby Chile could not be more plain across every dimension: corruption, the rule of law, investment, public sector debt, tax burden, infrastructure, regulation, etc.
Latin America seems to prefer two sorts of governments these days. One is a right wing nationalist heir to the military juntas of the past, best exemplified by the Kirchner regime in Argentina. The other are left wing populist-nationalist movements like Venezuela that tend to feature a streak of anti-Americanism. Both of these have produced pitiful results.
Brazil is a sort of lite version of the latter. Lula da Silva was a charismatic labor activist who led strikes and was jailed by the previous military dictatorship in his youth. Post-democratization, he went into politics. After moderating some of his more radical views, he was elected president on a reform agenda. While he had some success and was arguably and improvement on his predecessors, he ultimately failed to deliver on material changes in governance. His hand picked successor Dilma Rousseff has not been as effective and is in an electoral struggle for another term.
In line with the nationalist streak of this governing type, one of Da Silva’s primary concerns was Brazil’s amour-propre. As one of the world’s largest countries, he found it self-evident that Brazil should be treated as a great power. He lobbied for Brazil to have a permanent seat on the UN Security Council. He and others responded in kind to any affront to the nation’s pride, such as requiring American and only American visitors to be finger printed after the US imposed a fingerprinting requirement on foreign visitors. He sought out diplomatic coups where ever he could find them, which included cozying up to unsavory characters like Mahmoud Ahmadinejad who thinks Israel should be destroyed and that Iran has no gays (presumably because he has them executed when he can find them).
Da Silva forgot that there’s more to being a great power than being a big country – you’ve got to earn it. And as a very popular politician he did not seize his moment of opportunity to truly grasp the nettle of reform.
Meanwhile nearby Chile is one of the Latin American governments that’s followed a different model. It’s been run by center-left governments more or less the entire time since the restoration of democracy, and they’ve delivered on a good governance model that has taken them to effectively developed country status. Chile is now even a member of the OECD. Chile is basically the Minnesota of Latin America, and the results demonstrate it. This should show Brazil the size of the prize if the get their act together.
2. Geographic Disadvantage
Brazil is simply a long way from major developed markets. This puts it at a geographic disadvantage versus many other countries. Current airplanes cannot make a non-stop flight from Brazil to East Asia, arguably the most important emerging part of the world. It’s even a long haul from the United States, with relatively few gateway cities vs. say major European capitals. Brazil is time-zone advantaged with the US, however. It also speaks Portuguese instead of Spanish, which imposes a linguistic handicap.
3. Scale Disadvantage
Brazil is a big country, geographically and in population. Size can be an advantage, but it also makes reform difficult as it’s hard to turn a battleship. Brazil’s population of 200 million is more than ten times that of Chile.
Brazil’s two principal cities, São Paulo and Rio de Janeiro, are also megacities. São Paulo in particular is huge, and at north of 20 million people (more than the entire country of Chile) is the 10th largest city in the world. I recently wrote that it’s unlikely the world’s emerging megacities will turn the corner in eliminating dysfunction. Their problems are just too huge and their national growth rate too low. Though I’d consider this more hypothesis than conclusion at this point, my rule of thumb is that a megacity can only achieve escape velocity from pervasive dysfunction if they are a major city in a country that is the world’s current rising economic (or historically imperial) power.
Brazil is not that country, and two mega cities will be a drag on growth. Although São Paulo is an important emerging global city – 23rd in the world in a forthcoming report I helped create – I’m told that both São Paulo and Rio are growing more slowly than secondary cities in the country. A previous McKinsey study threw cold water on the idea that megacities are an advantage, noting their under performance by saying:
It is a common misperception that megacities have been driving global growth for the past 15 years. In fact, most have not grown faster than their host economies, and MGI expects this trend to continue. Today’s 23 megacities—with populations of 10 million or more—will contribute about 10 percent of global growth to 2025, below their 14 percent share of global GDP.
In contrast, 577 middleweights—cities with populations of between 150,000 and 10 million, are seen contributing more than half of global growth to 2025, gaining share from today’s megacities.
So I’m not surprised that it’s Curitiba, not one of the megacities, that’s where the innovative BRT revolution was begun. If I were looking to invest in Brazil, I’d be looking at this next tier of cities. Nor is it surprising that Santiago, Chile (population 5.4 million) has had great success in modernizing given its more moderate size.
Plain and simple the degree of difficulty is higher in Brazil because of the size.
Brazil is also a very racially diverse country with a number of challenges resulting from its history of oppression. Brazil had more slaves than any other country in the world and was the last New World colony/nation to abolish it. If slave reparations are on the agenda in the United States, how much more so similar issues in Brazil? Again, contrast with Chile, which never had very many slaves and abolished slavery in 1818. With the exception of a relatively few indigenous peoples on reservations, Chileans largely perceive themselves as ethnically homogenous, though with some skin tone based status (moderately sized…historically racially homogenous…Minnesota?)
Which is to say that it’s tough to entirely fault Brazil for not living up to the example of Chile. Its degree of difficulty is much higher. And its geography hamstrings its global interaction.
Nevertheless, solving the governance challenges to address the real issues Brazil faces remains the top agenda item. McKinsey has laid out a number of good suggestions, the real question is whether or not Brazil’s socio-political system can produce the ability to implement them.
Aaron M. Renn is an independent writer on urban affairs and the founder of Telestrian, a data analysis and mapping tool. He writes at The Urbanophile, where this piece originally appeared.
Photo: Ponte estaiada Octavio Frias - Sao Paulo by Marcosleal