Brazil’s Spectacular Rise Forces a Key Question: What is the Country Really Made Of?

Brazil has a lot going for it these days, particularly in light of the anemic growth being witnessed in the developed world. Discoveries of oil reserves, a growing …

Brazil has a lot going for it these days, particularly in light of the anemic growth being witnessed in the developed world. Discoveries of oil reserves, a growing consumer market, stabilized inflation, and the run-up to the Olympics and World Cup have caught the imagination of the international community. In a recent forum held at the Council on Foreign Relations in New York City, the term “Global Brazil” was even used to highlight the country’s critical role in solving some of the world’s biggest problems, including climate change, rising food costs and global energy demand. Let’s not forget that the country’s history is dotted by a pattern of economic booms and busts. Things may be different this time, but Nearshore Americas wonders whether too much is being asked of this Latin American hopeful.

Country of the Present, For Now 

The over-used phrase, “Brazil is the country of the future – and always will be” has played well into the speeches of visiting dignitaries and world leaders. Even President Obama used it during his stopover in March to suggest that “Brazil is now the country of the present” and that its future has finally arrived. With 7.5 percent GDP growth in 2010 and $48 billion in foreign direct investment, Brazil is definitely hot. But now, having consciously stepped onto the world stage both politically and economically, the days of hiding behind locked-up potential are over. So it’s time to see what Brazil is really made of; the real question is how much time Brazil has to clear out old skeletons and to set a course for the actual future.

During last week’s Rio de Janeiro Investment Conference hosted by the Council on Foreign Relations in New York, Head of Research at Tandem Global Partners Paulo Viera da Cunha declared that “Brazil has a 15-year window to get it right,” and to improve on the systemic ills that continue to threaten its place as a global power. Top brass dialogue during the panel discussions also hinted at a grittier side to Brazil’s economy: A stretched labor pool, xenophobia, wealth disparity, rising inflation, political corruption, inefficient government spending, bureaucratic court systems, property bubbles, crime, and gridlock on city streets reaffirmed some of the worries Nearshore Americas continues to monitor closely.

Francisco Alvarez-Demalde from Riverwood Capital: Finding the right mix of technical, entrepreneurial, and managerial talent in Brazil is not like “driving down Sand Hill Road in Silicon Valley.”

Moving Away from the Oil and Consumer Glut

Most economists point to two forces driving Brazil’s economic rise: A spend-happy and growing middle class and a surging global demand for commodities, particularly oil. Having a big consumer market and a rich reserve of natural resources is clearly a good thing for a developing economy, especially when it comes to attracting foreign investment. However, the bigger concern for resource-rich countries is whether the exploitation of growth factors will lead to greater competitiveness in the long-run.

In the case of Brazil, the glut in consumer spending has been accelerated by social welfare programs like “Bolsa Familia,” said to be the biggest wealth redistribution initiative in the world. Much of the money to fund these programs comes from taxes on oil and gas. Governor of the state of Rio de Janeiro Sergio Cabral confirmed that income from the big oil companies makes up around 15 percent of the state’s budget. For now, closing the income inequality gap has helped to unleash the power of the Brazilian consumer. However, some critics worry whether this investment will produce returns in the form of improvements in productivity, innovation, and new company creation.

Larry Rohter former New York Times Latin America bureau chief and host of the keynote panel also raised concerns about how oil and gas revenues will play into Brazil’s economic future. The overall fear is that royalties will not be distributed fairly and efficiently, and that overdependence on oil extraction could “suck” the innovative spirit out of the Brazilian people (aka the “Dutch Disease”).

Former US undersecretary of commerce for international trade and Clinton Administration advisor David Rothkopf retorted by saying that “big oil” can add to the innovative prowess of Brazil, since much of it is found in very deep waters, requiring an army of engineers to retrieve it. As a follow-up, Adriana Machado the government affairs director for General Electric in Brazil announced that GE has committed to building its fifth global research center in Petropolis in the state of Rio, focused on innovation in oil and gas extraction among other applications.

Big Business Hoarding Big Managerial Talent

“It’s less the technical talent and more of the business management side of the equation when it comes to labor shortages in Brazil,” affirmed Jon Karlen, General Partner at Flybridge Capital Partners, one of a handful of US based venture capital firms now scouring Brazil for the next big tech company. Karlen was referring to the fact that Brazil’s big energy and financial companies dominate the labor market by capturing most of the rising stars, before having a chance to share the love in the small-to-medium enterprise market. Francisco Alvarez-Demalde from Riverwood Capital also confirmed that finding the right mix of technical, entrepreneurial, and managerial talent in Brazil is not like “driving down Sand Hill Road in Silicon Valley.”

This type of talent shortage, particularly at the management level, is symptomatic of a strained education system and problematic from a macroeconomic perspective because top-heaviness and lack of economic diversity can make a country more vulnerable during boom and bust cycles. When asked whether Brazil’s economy was overheating, Rothkopf said that “there are some signs of overheating and that inevitably Brazil’s economy will have to manage its way through peaks and valleys.” How deep those valleys will be could depend on Brazil’s ability to build companies from the bottom-up.

Bracing for a Property Bubble in Gridlocked Sao Paulo

Between Copacabana Beach and the feverishly hard working middle class of Sao Paulo, Brazil is blessed with what is probably the hottest country brand out there. So much so that it managed to secure the World Cup in 2014 and the Summer Olympics in 2016. But according to Neil Crawford from PSG Investimentos, the excitement over these two events has also brought with it a boom and possible bubble in the real estate market, “particularly in the residential sector where easier access to capital is pushing home prices way up.”

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A sudden slide in property values could endanger the country’s leveraged financial services sector which, as we’ve all learned, can have enormous implications for the economy at large. Likewise, Latin America’s megacities have been getting a bad rap in development circles as being inefficient behemoths. A recent McKinsey report showed how “every dollar of GDP generated in Chile’s capital, Santiago, required 60 percent more energy than a dollar of GDP generated in (much colder) Helsinki in Finland.” The Sao Paulo Metropolitan Area is among the biggest in the region with 18 million people and 18 percent of the country’s GDP. Untested property markets and inefficient infrastructure is a problem all too common in cities across the developing world, and one that Sao Paulo will have to figure out, not only for the sake of the region but for the country.

Challenges into Opportunities

If Brazil’s various challenges are met head on and with ample financial support from the oil and gas industry, then Brazil really could become the country of the future. For now, it will most certainly remain the country of the present, at least until the 2016 and after the streamers from the Summer Olympics have been cleared.

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