Globalist Analysis

Weathering the Storm in Brazil

Why is Brazil’s recent economic development so unique?

Takeaways


  • Brazil has not reached safe harbor yet, but it is on the right course to extend more opportunities to those in greatest need and share the benefits of globalization to all citizens.
  • Brazilian ethanol from sugarcane now co-generates electricity to power the refining process and contribute modest, but growing amounts of electricity to the local grid.
  • Brazil may well be among the first national economies to recuperate from the economic crisis, helping to kick off a global recovery.
  • Brazil's approach has resulted in a rapid expansion of international trade and an era of unprecedented pro-poor growth.

Since the election of President Luiz Inácio Lula da Silva in 2002, Brazil has largely sailed through the straits of globalization and kept a firm grip on the tiller of economic stability.

The financial storm that rocked the global economy last year threatened to shipwreck Brazil.

Despite the gloomy forecasts, Brazil is weathering the storm by staying the course of its increasingly outward-oriented development strategy.

Its approach has resulted in a rapid expansion of international trade, an era of unprecedented pro-poor growth, and an historic reversal of the country's deep and divisive inequalities. Brazil's recent progress now serves as a beacon for those searching for a way out of the storm.

If the BRICs want to trade their way to a new global order, there may be no better helmsman th Brazil.

What makes this nation different from the other BRICs is not its rate of growth — which lags behind China, India, and Russia — but that its economic development is paying dividends for the poor majority. Their share of national income has increased at greater rates than any other social class in the country.

Under Lula, Brazil is making trade work for all — by paying down the national debt, guaranteeing credit to increasing numbers, ensuring energy security for sustained growth, raising the minimum wage while expanding employment opportunities, and targeting a new generation of social welfare policies to reduce poverty right now.

Today, Brazil can buffer the impact of economic shocks because of its lighter debt burden and the help of the Central Bank's foreign reserves, which total nearly $200 billion, over five times as much as those held in 2003.

Along with Brazil's successful debt management, both public and private sector banks have safeguarded the lines of credit by maintaining an average capital adequacy ratio that far exceeds those U.S. banks that begged for a bailout. Consumer credit has gradually and safely expanded, while Brazilian banks hold more in reserve and the Central Bank carefully implements monetary policy to guard against inflation.

Rising employment and wages now allow for paycheck secured loans, which boost overall consumer demand. Just in the first quarter of 2009, the number of housing loans jumped by 7%. Bloomberg reports retail sales increasing in the first months of the year as well. This past March, sales were 1.8%t higher than a year ago.

After an initial paralysis of the country's automobile sector in late 2008 and the government's smart move to suspend excise taxes, production and sales have already rebounded.

June car sales hit an all time record, with over 14.7% more sales than during the same period last year and a 16.8% jump from last month. CNN reports that General Motors of Brazil had the highest volume of sales in its 84 year history in the country. Brazil may well be among the first national economies to recuperate from the economic crisis, helping to kick off a global recovery.

Fueling economic security

Fuel prices were hitting all time highs just before the financial crisis struck in the last quarter of 2008. The double-barreled shocks of high energy prices followed by the credit market crunch ravaged those countries dependent upon oil imports and external borrowing.

In Brazil, the country's three-decade-old strategic energy policy may well have shortened the road to recovery. The nation's petroleum company, Petrobrás, developed competitive advantages in deep water exploration, and in 2007, declared that Brazil was self-sufficient in crude oil.

Paralleling this development, Petrobrás teamed up with Brazil's sugarcane growers and automobile industry (including General Motors and Ford) to expand ethanol production from sugarcane, install the necessary infrastructure for storage and distribution, and build a fleet of flex fuel passenger vehicles that can run on all ethanol or mixed blends.

Today, Brazil mandates over 20% ethanol blend in all gasoline. All ethanol (E100) pumps are available at nearly all gas stations to serve the flex-fuel fleet. Nearly 90% of all passenger vehicles produced and sold are now flex-fuel equipped.

Through technological innovation and coordinated public/private investment, Brazilian ethanol from sugarcane now co-generates electricity to power the refining process and contribute modest, but growing amounts of electricity to the local grid. Topping off the tank of energy policies, the government has established an innovative and graduated biodiesel mandate that galvanizes investment in the production of this scarce renewable fuel.

Although Washington hesitates on free trade in ethanol, Brazil's experience with biofuels offers a partial solution to global warming and a sensible path for BRICs such as China and India, as well as a host of oil import-dependent developing countries.

This concerted effort to achieve energy security, in part with low carbon renewable fuels, now promises to frame international efforts to mitigate greenhouse gases at the upcoming post-Kyoto protocol negotiations known as COP15.

Globalization for all

In the past, high energy prices and financial crises would have shipwrecked Brazil. Now these conditions only underscore Brazil's recent economic and social progress.

The sustainability of Brazil's outward oriented development strategy is dependent on a global recovery, but it is anchored to a set of policies that have created historic numbers of jobs, raised the real value of the minimum wage, and rapidly slashed poverty and inequality.

President Lula promised all Brazilians three meals a day upon taking office in 2003 and the galley has been busy every since. From 2004 to 2007, the country generated ten million new jobs, surpassing all records since 1992 when the first measures were recorded.

During the first five months of 2008, 27% more new formal sector jobs were added than in the same period the year before. The inflation adjusted value of the minimum wage has grown 46% since 2003.

The government's heralded bolsa familia or family stipend conditional cash assistance program has reached over 11 million families at a cost of less than 1% of GDP.

Overall, the per capita income of Brazil's poorest half of the population has increased between 8%-11% annually since 2004. Brazil's success rests on a sustainable foundation of equitable democratic development that distinguishes it from the other BRICs.

The Lula administration has managed to "lift all boats," especially those of the poorest. Brazil has not reached safe harbor yet, but it is on the right course to extend more opportunities to those in greatest need and share the benefits of globalization to all citizens. Who could ask for more?

Observers and historians are not surprised that President Lula, Brazil's working class captain, enjoys record approval ratings reaching 70% in his seventh year in office. Though the focus on Lula may be misleading, it is understandable, considering he so perfectly represents the majority of Brazilians who have worked so diligently to reach the country's potential, grandeza.

Brazil is still an emerging economy and novel source of global leadership. Its government does not represent the largest or most powerful of the BRIC nations. Yet, all eyes will be watching as Brazil weathers the storm and sails toward a globalization that works for all.

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About Mark S. Langevin

Mark S. Langevin is Director of the Brazil Initiative and a Research Professor at the Elliott School of International Affairs at George Washington University.

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