On Business: Brazil's natural advantages

Stable economic growth is attracting large amounts of foreign investment, but can the country realise its potential?

by Joachim Bamrud, World Business
Last Updated: 23 Jul 2013

Brazil is a country with enormous potential - and will always be a country with enormous potential. So goes a very old Brazilian joke about the failure to realise that potential despite the country's many impressive advantages, such as a large economy and population (Latin America's largest on both counts) and huge natural resources, including iron ore, soybeans and coffee. Now, however, pressure is mounting on its president, Luiz Inacio Lula da Silva, to start implementing the reforms that will put Brazil closer to truly realising its potential.

Although Brazil has seen steady economic growth under Lula, it has lagged behind the other members of the Bric group (Brazil, Russia, India and China) of emerging markets. Average GDP growth over the past four years has been only 2.8% - significantly lower than China (10.1%), India (8%) and Russia (6.8%). Forecasts for 2007 show a similar trend, despite the likelihood of Brazil posting its best performance since 2000.

Lula, a former union leader who assumed office in January 2003 and won re-election last year for another four-year period, has vowed to boost economic growth to 5% a year. To achieve that goal, the government needs to reduce corporate taxes, cut public expenditure and encourage private infrastructure investments.

However, it also needs to bring down the Custo Brasil, a term that refers to the high cost of doing business in Brazil. This cost can come down only if Lula implements other reforms such as reducing government red tape and the size of the bloated and inefficient Brazilian state (mainly through privatisations and staff reductions), simplifying the tax system, implementing social security reform, improving competitiveness, making it easier to start a business by reducing red tape, liberalising labour laws, reducing costs to import and export products, and reducing the still widespread corruption.

Unfortunately, it seems doubtful that Lula will be able to implement these reforms, either because he won't push for them or because he will face too much resistance from hard-core elements in his own party. It is likely he will continue to maintain the status quo as far as possible, much as he has done in his first government.

Does that mean Brazil won't be able to realise its potential? Not at all. Brazil is benefiting from an unprecedented combination of favourable factors independent of Lula's reforms. Foreign investors are pouring money into the country, lured by the combination of a gigantic market and stable economic growth (even low rates add up). This year, total foreign direct investment is likely to reach $19 billion, a full billion above last year, according to Bear Stearns. And Brazil has seen a trade boom over the past few years, fuelled largely by strong demand from China. The high levels of FDI and trade are likely to help boost GDP growth over the next few years.

And at the same time, Brazilian companies - big and small - are finally focusing on international markets after years of concentrating solely on the big (but limited) national market. Brazilian giants such as CVRD, the world's largest iron ore producer, CSN, Brazil's largest steel producer, Embraer, the world's top producer of regional jets, Odebrecht (construction), Braskem (chemicals) and AmBev, which merged with Belgium's Interbrew in 2004 to create one of the world's largest brewers, are considered world-class companies that can compete with the best anywhere. CVRD, especially, has become a global player, acquiring Canadian mining company Inco (the world's second-largest nickel producer) last year for a whopping $17.8 billion. Even state oil giant Petrobras has won plaudits for its professional management and efficient operations, both nationally and internationally.

In addition, despite continued high levels of state debt, the international credit ratings agencies are gradually revising their ratings and the country is expected to reach investment grade as soon as next year. The main effect will be to further enhance the credibility of Brazil's international companies. Much like India, Brazil will boost its economic power thanks to local and foreign companies, despite structural problems and lack of necessary reforms.

However, Brazil and India differ in one major area: education. Brazilian executives have expressed admiration at the quality of the Indian labour force and frustration with the level of Brazil's education system, where there is insufficient quality at primary level and too few pupils going to university. This is a problem that affects not only Brazil but most Latin American countries - in contrast with most Asian countries. Brazil will lag behind in economic growth unless it reduces the Custo Brasil and improves its education system.

- Joachim Bamrud is editor-in-chief of Latin Business Chronicle.

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