Brazil: No reverso

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British politicians like to boast "they have no reverse gear", but in Brazil, going backwards is a destination in its own right.

At any junction, the way to "reverso" is always clearly marked. When I first visited Brazil I thought this "reverso" must be a very important place. I belatedly realised it just meant going back the way you came. In Brazil that's considered a legitimate option for any motorist; and over the years, Brazil's economy has been pretty good at it.

Brazil is racing ahead these days. Whether it's growth, house prices or investment - everything that's flat or falling in the UK seems to be taking off in Brazil. Last year Brazil's GDP grew by 7.5%.

This country of nearly 200 million people has had heady periods of growth in the past. In fact, growth in the 1950s and 60s averaged more than 7% a year. But they have also had some equally dramatic busts. The 80s and 90s was a grim period indeed, when national output didn't even manage to keep up with the growth of the population.


Supposedly, that's all changed. Sensible economic policies and a very fair wind from rising commodity prices has brought economic stability and - since the start of the century, at least - some decent growth.

The country's terms of trade - the price of its exports relative to its imports - has risen by more than 80% since 2000. And even with a brief recession in 2009, growth has averaged more than 4% a year since 2005.

This time, the politicians say the road to reverso is blocked. But - as I have written before - success has brought its own problems, including a rising exchange rate and a lot of short-term capital inflows of the kind that makes finance ministers nervous.

That high exchange rate has made it hard for Brazilian companies not involved in the booming commodity sector to compete. Manufactured goods accounted for 58% of exports in 2000; last year the share had fallen to 38%, while the primary commodities' share had risen from 22% to 46%.

It also raises another question. Is it possible for a country as large and diverse as Brazil to get rich on the back of its natural resources?

Value chain

People like Eike Batista, the richest man in Brazil, seem to think so. A new shipping superport he's building, up the coast from Rio, is supposed to demonstrate how primary commodities can lead a country up the value chain.

If all goes well, the revenues produced from exporting iron ore to China in the next 2-3 years will then pay for a steelworks and, ultimately, cement and even car factories. All on the same site.

But that is one scheme, which it has taken him a decade to get off the drawing board. Brazil is going to need a lot more than that. And, for the moment, "Dutch Disease" is a real concern: a hollowing out of Brazil's industrial sector, as the boom in commodities (plus a hugely competitive China) gradually prices them out of world markets, and the Brazilian one.

Overall, Brazil had a trade surplus with China last year of $5bn (aren't they the lucky ones). But it had a record $23.5bn deficit when it came to manufactured goods. Imports from China went up 60% last year alone.

There are examples of countries that have reached the big leagues with heavily resource-based economies: think Finland, Canada or Australia. None of these is as large as Brazil, with such a heterogeneous population. But then again, none has quite the resource base that Brazil has, either: a larger supply of renewable water than all of Asia; more usable farmland than America and Russia combined; and, more recently, the biggest discovery of oil the world has seen in 30 years.

As many businessmen pointed out to me during my trip, Brazil's size also gives it another built-in advantage that those other countries lack: a big internal market of nearly 200 million potential consumers.

Back in the 50s and 60s, they thought that was enough. Like many Latin American countries, they decided the best way to get ahead was to close the economy to foreign competition in the hope that domestic industries would then burst forth on to the scene.


Even in the early 1990s, it was almost impossible to buy a regular computer at a reasonable price in Brazil. But it didn't give rise to much of a domestic computer industry. It just meant that Brazilian companies were hopelessly behind in their use of IT. And everyone begged their friends to buy them computers when they went on holiday abroad.

There are still politicians - and industrialists - who talk about the need to protect "strategic" sectors from the full glare of global competition. And, as I wrote in that earlier piece, the government has tried to safeguard their financial system against a flood of footloose global capital.

But most seem to accept that Brazil will need to build a prosperous future the hard way: cutting current spending to invest more in public infrastructure (a lot more), and, finally getting to grips with some regulation and red tape that probably does more to hurt Brazil's competitiveness than the high exchange rate.

While in Sao Paulo I made a brief pilgrimage to Libertade - the Japanese district of Sao Paulo. You might be surprised to hear that Brazil has a thriving Japanese community - many of them third, even fourth generation. Their parents and grandparents came here, with the Japanese government's blessing, in the first decades of the century, and you can see why.

Back then, anyone could tell that Japan was a backward, resource-poor nation going nowhere - and Brazil, with its all its natural wealth, was the country of the future.

You might say it was an historic misjudgement. Japan then showed the world you didn't need natural resources to become one of the richest countries in the world. While Brazil demonstrated how easy it was for countries laden with natural wealth to screw up.

There will surely be more bumps in the road for Brazil. But I'd say it's a better bet now than it was a hundred a years ago.