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Brazil: Just Another BRIC in the Wall

Things haven’t been going so well for the BRICs lately. China’s growth numbers are down considerably from their highs of a couple years ago, and China’s central bank has been taking seriously the dual threats of slowing growth and rising inflation from expansionary policies. Economic woes in India, meanwhile, have transformed it from a potential economic threat to China into “the Greece of Asia” in a remarkably short period of time.

Russia has been shaken by political unrest and its economic performance remains well behind that of the Asian giants. Now Brazil is the latest BRIC to report bad news. The Economist reports that in 2011 Brazil’s GDP grew by a paltry 2.7 percent. What’s worse, the combination of an overvalued currency and government intervention in markets has led many to worry that the country may sink still further in the coming years. And many are even beginning to question the miraculous growth of the past decade:

Foreign investors and those who advise them are reporting a new, less starry-eyed approach. “The days of Brazil being given a free pass are over,” says Ivan de Souza of Booz & Company, a consultancy. Some go further: in an article in Foreign Affairs magazine called “Bearish on Brazil”, Ruchir Sharma of Morgan Stanley argues that the country rose with commodity prices and will fall again when they do.

A reassessment of Brazil’s recent performance is overdue. Between 2000 and 2010 Brazil’s terms of trade improved by around 25%; in the past five years private-sector credit doubled. Such tailwinds cannot continue to blow—and even with them Brazil has grown on average by only 4.2% a year since 2006. Only productivity gains, and more savings and investment, can provide fresh puff. Those are nowhere to be seen: IPEA, a government-funded think-tank, puts annual productivity growth for the past decade at a paltry 0.9%, much of it from gains in agriculture. Investment is only around 19% of GDP. Add soaring labour costs and a still-strong currency, and many analysts are lowering their sights for potential annual growth to about 3.5%.

Via Meadia has been skeptical that the BRICs have all that much in common — and that their economic performance is going to stay red hot for the long term. BRICs do not grow to the sky, and in any case these four countries have very little in common.

We wish them all well and believe that their success would be good for American foreign policy and for global stability; we view the bad news with chagrin, not triumphalism. Brazil’s success and its potential to help all of South America towards a brighter future means a lot to the United States; the most recent news suggests that it may take Brazil a little longer to reach its full potential than some of its friends have hoped.

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  • thibaud

    “Ruchir Sharma of Morgan Stanley argues that the country rose with commodity prices and will fall again when they do”

    Talk about the blindingly obvious!

    I recall a shrewd investor presentation on behalf of Russian companies in 1999 which was cleverly labeled “”, with an asterisk and a large footnote:

    * .com = commodities

    As with commodities, investors and analysts tend to be excessively bearish about these countries when recent prices have been low (as in the late 1990s) and excessively bullish when the cycle has already turned.

    But the overall, long-term trend for these nations will almost certainly be strongly upward, because they, like the US, have

    1) abundant natural resources that the world desperately needs and

    2) very large populations that include millions of exceptionally talented, well-educated, shrewd and resourceful people.

    Re. #1, Brazil has massive oil reserves and even more important supplies of that other, more important liquid, FRESH WATER. So does Russia. It’s water that’s effectively exported when you export sugar, wheat or any other ag commodity, and coal also requires vast amounts of water to wash and produce.

    Re. #2, the human capital, aside from India, the other nations’ wealth has been overlooked by investors. In part this is because corruption in these nations has driven out some of their the most talented people – you can’t make a fortune off your brainpower if you can’t protect your IP in a court of law – but it’s nonetheless the case that Russia especially and the others as well have huge, untapped reserves of technical and entrepreneurial talent.

    If rule of law improves in these nations, then look out above. Their entrepreneurs and scientists will start addressing and solving some of the really important problems – in energy, transportation etc – that so many of our time-waster- and online game-obsessed Silicon Valley VCs tend to ignore.

    As Talleyrand said about Russia, the BRICs are “never so strong or so weak as they appear.” Investors now are likely to overlook their hidden strengths.

  • Steven E

    the most recent news suggests that it may take Brazil a little longer to reach its full potential than some of its friends have hoped.

    As the old cliche goes: “Brazil is the country of the future—and always will be.”

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