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From Rio to Freo: Are we going nuts for Brazil?

By: Tim Harcourt, Chief Economist, Australian Trade Commission
10 December, 2009

Is it now officially the ‘age’ of Brazil, with the charismatic and populous South American nation picking up the rights to host both the FIFA World Cup in 2014 and of course the Olympic Games in Rio de Janeiro in 2016?

Is Brazil, after many false starts, looking like it will fulfil its promise of being one of the world’s great economic powerhouses? Some have predicted that by the times of the Rio Olympics Brazil will be the fifth largest economy in the world (as compared to ninth largest today depending on how it is measured).

Of course, the world has constantly waited (and hoped) for the economic rise of Brazil. Distinguished commentators such as US economic historian Charles Kindleberger, often predicted the Brazil would be the next big thing in the world economy and Brazil's recent economic performance to stave off the worst impacts of the global financial crisis (GFC), has given some reasons for the Brazil boosters to feel optimistic.

Brazil's most recent economic surge has come under the stewardship of presidency of Luiz Inaico Lula da Silva, known affectionately as 'Lula'.

In 2002, on my first visit to Brazil, there were mixed feelings about Lula as he was about to run for the presidency for the fourth time for PT, (translated as 'the Workers party'), the party he founded during the return to democracy.

In Sao Paulo, there were doubts about his agenda, but in Rio de Janeiro and particularly in the southern state of Porto Alegre, a PT stronghold, where I spoke at the World Social Forum there was a lot of support.

In the end, Lula won the election and also managed to be re-elected again in 2006 with a comfortable majority. Over this time, Brazil has had to face a number of economic and social crises that have been both external and domestic in nation.

When Lehman Brothers failed, and the sub-prime spread throughout the world, the markets looked closely at Brazil, which after all, had experienced a major financial crisis as recently as 1998 under Lula's predecessor, Fernando Cardoso.

But of all the emerging economies, Brazil has performed reasonably well in the GFC. The credit crunch didn't knock much of a hole in the 'BRIC' (Brazil, Russia, India and China) wall, although one of the 'BRICs', Russia has had its usual share of financial difficulties.

So why has Brazil done well? Trade is one reason. Lula has resisted the protectionist impulses of some of his populist supporters and Brazil has actively forged strong relations with other emerging countries not just in Latin America but also in Asia and Africa.

This has been part of Brazil's 'South-south' strategy, although Lula has played a key role in engaging with the developed economies too at the G20. Given Brazil's large domestic market, (exports are only 15 per cent of GDP) it is to their credit that they have pursued an open trade agenda.

Whilst China drove Australia's export growth in the middle of this year, Brazil too has benefited from 'bamboo shoots' as well as 'green shoots'. According to Banco Santander, 79 per cent of Brazilian exports to China are agriculturally based, though Brazilian exports to the rest of the world are more focussed on energy and manufactures.

Another reason is that Brazil only needed a modest stimulus package, at around 1.5 per cent of GDP, to keep the engine running in the GFC. The work on economic reform and his predecessor Cardoso to embrace fiscal discipline, inflation targeting, and a floating exchange rate, meant less spending was needed during the credit crunch.

The Brazil of 2009 looks very different from the Brazil of 1979, when most South American countries experienced financial instability and its associated political fall out. Brazil is now different and foreign investors and trading partners are treating it accordingly.

So what are the opportunities for Australia? According to Greg Wallis, Australian Senior Trade Commissioner in Sao Paulo, "traditionally Australians have thought of Brazilians as competitors in primary exports, but increasingly we are collaborators in a whole range of industries from oil and gas production, to agribusiness, ethanol, biotechnology and financial services.

"People in Australia often don't know that Brazil is a sophisticated economy. For example, Brazil's major export to Australia is passenger airplanes from Embraer."

But as Wallis points out: "It's as much an investment story here now as it is a trade story."

Bi-lateral has surged by 58 per cent over the past year and there are now over 500 exporters to Brazil with major Australian players like Pacific Hydro, Mincom, all playing a role in Brazil, and Brazilian giants such as JBS and Vale investing in Australia.

Wallis believes, that whist there is still "much to do to get Brazil on the radar in Australia" big events like the World Cup and the Olympics in Rio will help and "Brazil's similarities in Australia in agriculture and resources means that investment in clean energy and related technologies to reduce emissions is spurring activity by both countries – often in concert."

And according to Cristina Talacko, the head of the Australian-Brazilian Chamber of Commerce, climate change is creating more collaboration between the two countries from Rio to Freo (Fremantle).

"Many of our members are involved in environmental industries and with the challenges of Copenhagen occupying the minds of the world's leaders and with both countries having a strong clean energy focus, Australia and Brazilian companies will be part of the solution," she explains.

In 2010, it will be Lula's last year. In 2002, the year of Lula's first election (after 3 tries), Asia hosted the world cup for the first time – in Korea and Japan – and Brazil won for a record fifth time. In 2010, it is Africa's turn as South Africa is the host and Brazil is again a chance to win, as always. Lula over his term has worked very hard on Brazil's economic links with both Asia and Africa.

But after South Africa 2010, Lula will be gone (there is a two term limit on the Brazilian presidency like in the USA), and Brazilians will be pondering Lula's legacy (rather than 'Lula's lunacy' as was predicted by some of his detractors when I interviewed them in Sao Paulo 2002).

Of course, one legacy of Lula, will be the fact that Brazil won the 2014 World Cup and the 2016 Olympics under his watch, so we're guaranteed two big parties – Brazilian style of course – but hopefully there'll be an economic legacy from his term as well.

A sound legacy would be one in which Brazil engaged with the world, drove economic growth for the region and for the emerging nations, and reduced the terrible crime and poverty that exists in the 200 million strong nation. For one thing, I am sure, Charles Kindleberger would be glad to have been proved right about Brazil, once and for all.

Source: Australian Trade Commission

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