Portfolio: Constraints on Brazil's Prosperity
Video Transcript:
Vice President of Analysis Peter Zeihan examines the geopolitical and economic factors that constrain Brazil's prosperity.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
There has been a lot of talk of late of how Brazil is a golden investment opportunity. There are certainly a number of trends that STRATFOR sees that are very positive but what most people don't realize is Brazil has a lot of deeply ingrained geographic problems hindering its development. The primary problem is that the core geography is a series of coastal enclaves on the southeastern coast on the Atlantic, very close to the Argentine border. They are all separated from each other, there is something called the Grand Escarpment that pours off the Brazilian Highlands and the cities are in little pieces of land at the bottom of that escarpment. It is very difficult for them to get economies of scale. The result is a very different settlement pattern than you saw in some of the more traditional states like Argentina and the United States or in northern Europe. You can't just go up the escarpment and set off on your own. You are hitting rainforest and you are hitting areas that don't have navigable rivers. So you can't set up shop and export to the wider world in a short period of time. Instead, Brazil has a much higher capital cost for any sort of development. So you can't have small free holders. Instead you have corporations or rich families who go in and set up their own personal company towns, plantation farms, that sort of thing. Now these oligarchic interests consider whatever they've invested into an area to be their God-given right. It is their money, it is their land, it is their power and they see no reason to share -- not even with each other. So what infrastructure the Brazilians do have, is typically isolated in specific pockets. It is not well integrated together.
Additionally, the climate there is not good for most types of crops, really only coffee and sugar do very well in Brazil. These are large plantation crops that require a lot of low skilled labor; it's is not easily mechanizable. So you have a system that has insufficient disaggregation infrastructure and yet has a very small skilled labor pool. Whenever the Brazilians can manage to get some money into the system, whenever they can get a little bit of credit, they immediately run into labor and transport bottlenecks and inflation goes through the roof. Historically, Brazil has been one of the world's highest inflationary but lowest growth economies. In the 1980s, the situation got so bad that inflation was in 2000 percent a year. In fact, if you take that period and bookend it, accumulative inflation was 1 quadrillion percent, which is the highest inflation in any major economy since Weimer Germany. The government's solution was to absolutely destroy growth in order to get inflation under control. The banks were heavily regulated, foreigners weren't allowed to pump too much credit into the system, the government drastically slashed its budget in order to keep consumption down and even got rid of a lot of the subsidies that kept the population quiet -- all in order get inflation back under control. This "real plan," as it was called, was a great success; one of the greatest successes in macroeconomic reform in recent decades. So even on those rare occasions when Brazil has been able to achieve four, five, or maybe even 6 percent economic growth, inflation picks up: typically strangling that growth even as it is just starting to get going.
In recent years the Brazilian success in reining in inflation has led to a series of policies that are greatly respected by the investment community. Low government debt, low subsidies, healthy banks, these are all things that investors are always looking for. And so investors have been pouring lots of capital into Brazil. This puts Brazil into a bit of a bind. All that incoming money is driving the Brazilian real up. It has risen by about 50 percent in the last two years. That strong of a currency is absolutely gutting the industrial base in Brazil because now they can't compete. Remember, this is a low industrial base, a low skilled economy: they can't compete at the top of the value-added chain; they have to compete on price. With a 50 percent increase in the currency value, their exports simply aren't doing well. In fact, they have signed a number of trade agreements with the Chinese allowing the Chinese companies to export directly into the Brazilian market where they are in the process of hollowing out the entire Brazilian industrial base.
Addressing this challenge is difficult. It requires a series of changes in educational policy, immigration policy, industrial policy and ultimately a different trade deal that will allow the Brazilians to expose themselves to competition in a safe way. These would be difficult things for any state but what most people have forgotten is that Brazil is very new to the international community. It was only in the early '80s that civilian rule was reinstated; it was only 1988 when the Constitution was adopted; it was only in 1994 that their currency came into being. Brazil needs strong leadership that is willing to break from a lot of the traditions the Brazilians establish the last 30 years and they need it now.
