Brazil: Beyond Natural Riches

• History
• Culture
• Economy

Fantastic and always on a grand scale, the spectacular floats at Rio’s Carnival parade are the ultimate expression of Brazilians’ zest for life.

Brazil is best known to the world for the Amazon rain forests and the Rio Carnival, appropriately so. They symbolize the immense natural wealth and rich cultural diversity of the largest economy in Latin America. They also showcase the resource base and vibrancy of a population that could make Brazil one of the largest economies in the world.

History

An ethnic melting pot, richly endowed in natural wealth

Ever since Europeans arrived in Brazil in the 16th century, the country has been a veritable melting pot of different races and their cultures. As the indigenous population could not meet the rising labor demand, European colonists brought Africans as slaves to work in the sugarcane fields. By the time Brazil declared independence from Portugal in 1822, the country had an almost equal mix of American-Indians, Europeans and Africans. This predominantly Roman Catholic country now has the largest population of Africans outside the African continent.

Nature’s bounty has helped Brazil become a major supplier of minerals and farm produce to the world. The country is the largest exporter of orange juice, sugar, coffee, tobacco, beef and iron ore. Brazil is also a major producer and exporter of soybeans, bananas and cashew nuts.

Volatile political environment retards economic growth

Despite being a resource-rich country, Brazil’s economic growth was hampered by political instability. The country was under military rule for most of the last century. Even after democracy was re-established in the late 80s, the economy faced heavy corruption and mismanagement, which led to low growth and income inequality.

Brazil’s economy has gained strength since the turn of the century, helped by higher global commodity prices and better economic management.

President Lula, who was a shoe shine boy and factory worker in his youth, has focused on reforms to improve efficiency despite his socialist leanings.

Culture

A culture more multi-hued than an Amazon parrot

Though Brazil is one of the most ethnically diverse countries, nearly 200 indigenous societies nurture their distinct culture and traditions in exclusive preservations.

The Rio Carnival, Brazil’s cultural showpiece, may owe its origins to the introduction of Christianity after the arrival of Europeans. Yet, Brazilians transformed it into an uninhibited and exuberant celebration of color, pageantry and camaraderie in a way no other people can even dream of. In Brazil, even the mundane becomes spectacular. No need for reasons to celebrate and nothing will be left out!

The shifting of the capital of the Portuguese empire to Rio de Janeiro in the early 19th century, and the transfer of the royal family to Brazil, accentuated the European influences. European customs and traditions were ingrained into local culture.

Even when the country freed itself from Portugal as the Independent Empire of Brazil, the change was fostered by a Portuguese prince who became dear to Brazilians as “Dom Peter”.

The cross-cultural influences are highly visible in what is now modern Brazilian culture, be it in music, literature, or performing arts. While at different times in Brazil’s cultural history any one of these external cultures were predominant, they all have now amalgamated into a rich medley of indigenous, European and African colors, smells, tastes and sounds. Every heritage became shared, something to be cherished and celebrated by all.

Though some of its celebrations and way of life may outwardly appear European or African, Brazil has also strived hard to preserve the rich indigenous cultures unique to the Amazon basin as they were. When the Europeans first arrived, the land was home to hundreds of tribes with distinct languages and culture. Some of these societies were lost, but the remaining are the links to the country’s vivid past dating back thousands of years. Around 200 distinct indigenous societies, who speak as many as 180 different languages, now live much like their forefathers did in exclusive preservations across Brazil. That is diversity at its very best.

Economy

Ethanol capital of the world, long before it was fashionable

Extensive sugarcane plantations like this one in Sao Paulo make ethanol production highly cost effective in Brazil.

What started as a desperate strategy to reduce energy imports, following the oil shock in the early 70s, has now firmly placed Brazil as the global leader in the use of bio-fuels. Over 80% of all new cars sold in Brazil are flex-fuel, with engines that can burn gasoline, pure alcohol, a blend of alcohol and gasoline, or even natural gas. Gas stations in Brazil usually don’t sell pure gasoline, as the fuel of choice is gasoline blended with ethanol or gasohol. There is even the option of 100% ethanol, if the vehicle is suitably equipped. While this eco-friendly fuel is now becoming more popular the world over, including the U.S., Brazilians have been using gasohol for nearly three decades now.

Today, close to 40% of the transport fuel demand in Brazil is met by ethanol. In sharp contrast, this ratio is below 4% in the U.S., despite the administration’s efforts to promote the eco-friendly fuel.

Yet, Brazil makes ethanol from sugarcane, unlike the U.S., where ethanol is mostly produced from corn. That makes a big difference, as the manufacturing process is more cost and energy efficient. Ethanol made from sugarcane is more environment friendly, with emission reductions of 70% when compared to gasoline.

As the most efficient producer of ethanol, it should be no surprise that Brazil is also the world’s biggest exporter of ethanol. Although energy prices have fallen from their peak in mid-2008, they are likely to rise as the global economy recovers. If they continue to expand, as expected, ethanol exports from Brazil can only increase in the future. Some Brazilians are so bullish about the export potential that they claim their country will be the ‘Saudi Arabia of bio fuels.’

Oiling the growth engine

Recent oil discoveries will make Brazil a major energy exporter and support economic growth in future.

When President Lula da Silva proclaimed in a radio address on August 31, 2009 that it was “independence day,” he had not forgotten that Brazil’s September 7th Independence Day was still a week away. The charismatic leader, known for his political rhetoric, was announcing an ambitious and radical government plan to use the country’s vast new oil finds to fuel economic growth.

The agenda, if approved by Brazil’s Congress, will make the government an automatic shareholder in all new wells. Further, it will be mandatory for the government to use all its earnings from the oil reserves on development projects. Presently, the federal government sells major oil companies concessions to exploit oil fields. Under the proposed plan, Brazil’s state-run, and also its largest, oil firm will be guaranteed the primary stake in new offshore oilfields, which the government claims boast reserves of up to 50 billion barrels.

Brazil has come a long way from being a net importer of oil not even a decade ago. With its newly discovered Tupi reserve, which is estimated to hold as much as eight billion barrels of sweet crude, and other oil and gas finds along 500 miles of its Atlantic coastline, Brazil is self-sufficient in conventional energy today. Its increasing reliance on ethanol will make sure that domestic oil demand will not rise as fast as overall energy demand, even if economic growth accelerates. When oil starts flowing from the new fields by 2011, Brazil can expect to become the second biggest oil exporter from the region — only behind Venezuela.

The B in BRICs

When Goldman Sachs included Brazil in its famous BRICs framework of emerging economies, it was more a recognition of its future growth prospects rather than the anemic growth rates of the last decade. Among the four countries, the BRICs report identified Brazil as the one which will be most challenged to sustain growth. To Brazil’s credit, the country grew reasonably well until 2007, and has fared better than Russia during this recession.

The major impediment to Brazil’s growth is its low investment to GDP ratio of around 18%, when compared to over 35% for both China and India. High real interest rates have historically been another growth-retardant, but have come down recently along with lower inflation.

Brazil is also projected to benefit from its young population, with the rise in the labor force contributing significantly to future growth. But investment in education has been very low and that could prevent the country from achieving its potential.

Businesses thriving and consumption booming

Open cast tin mine in Brazil. High commodity prices have fueled economic growth in recent years.

Even a few years back, a billion dollar IPO by a Brazilian company would have been unimaginable. But the largest Brazilian credit card company, which raked in close to $2 billion in one of the largest IPOs of 2007, set the ball rolling. More significantly, the IPO of this credit card company valued the business at close to $10 billion, reflecting the huge transformation the nation’s financial and consumer markets have seen in recent years.

Since then, it’s been one big-ticket listing after another. A Brazilian oil firm founded in 2006 launched its $4 billion IPO in 2008 and a credit card payment processor raised $4.6 billion from the markets in June 2009.

But the biggest by far has been the $8 billion IPO of the domestic unit of Brazil’s largest foreign bank. After the listing in October 2009, the market value of that unit was the same as some of the largest European banks. As the title of an article on Brazil suggests, ‘it is Adios to poverty and Hola to consumption.’

Ever since the country’s economy stabilized and started expanding at a faster pace, income levels have steadily increased. Between 2004 and 2007, the country’s average monthly household income doubled from $287 to $584. Further, in 2008, the middle class, or those with a monthly income of $600-$2500, made up more than 50% of Brazil’s population. Low interest rates and easier credit availability have led to a dramatic rise in consumption. This change has made Brazil’s economy more broad-based, as the contribution of domestic consumption has steadily increased.

Better placed than ever to realize its potential

The growth appetite and maturity shown by the larger companies offer the best way forward for the Brazilian economy as a whole. The country should step up capital investments, promote research and innovation, and build efficiency. Only then can Brazil hope to grow at close to its true potential and catch up with the other major emerging economies.

Glorious Amazon sunsets and other attractions bring millions of tourists to Brazil every year.

Thankfully, Brazil is better placed than ever to weather the global financial turbulence. Though primary articles continue to dominate Brazil’s exports, better product and geographic diversification makes its export fortunes less vulnerable to commodity cycles. Domestic consumption has increased dramatically and the country is almost self-sufficient in energy and other resources, further reducing its vulnerability to external shocks.

Government finances are in the best shape in decades, external debt is under control, inflation is better managed, and real interest rates are close to their lowest in the country’s history.

For decades, Brazil strived and waited for a bright economic future that never arrived. “Brazil is the country of the future — and always will be” was the refrain of Brazil commentators ridiculing the country’s inability to live up to its promise. That joke is passé. The nation has started realizing its immense potential and is better equipped and more capable than ever to drive its own destiny.

“Faster, Higher, Stronger”

Perhaps, the most explicit sign of Brazil’s prominence on the global stage has been its ability to outbid Chicago and Madrid to host the Olympics in 2016. Given the budgets and scale of operations they require, the Olympics can be a logistical nightmare even for the most advanced of nations. Therefore, by placing its faith on a country which was forced to introduce a new currency to fight hyperinflation barely 15 years ago, the world is acknowledging Brazil’s newfound political and economic clout.

Rio 2016 has given Brazil not only a medal of honor but also an opportunity to improve its infrastructure. In fact, the country can take a cue from China. The Chinese made the most of the 2008 Beijing Olympics by creating lasting symbols of growth, such as Beijing Airport Terminal 3, the world’s largest airport building. Fortunately, the Brazilian government seems to be making the push in the right direction.

Apart from trying to create an investment corpus for development projects, the Lula administration has been backing several port projects and contracts for highway construction. A high-speed rail line between Sao Paulo and Rio de Janeiro is also on the anvil. Given this pace of development, the Olympics motto “Faster, Higher, Stronger” may soon rub off on Brazil’s growth rate.