Brave New World

by

Leslie U. Harris

 

It was impossible for Conçalo Coelho, a captain in the fleet of Portuguese Admiral Pedro Álvares Cabral, the discoverer of Brazil less than two years before, to even imagine what would arise along the shores of the bay he sailed into on January 1, 1502. His navigator, a Florentine by the name of Amerigo Vespucci, perhaps thought it was the mouth of a river. If so, he got it wrong. But maybe the Italian, unfamiliar with Portuguese, meant to say ria, a now-archaic word meaning “sound” in which case he got it right. We shall never know. Whatever the explanation, the town that was founded on Guanabara Bay in 1565 is called to this day the “January River,” Rio de Janeiro.

When Vespucci got back to Florence the following year he wrote two letters describing his voyage which, when published in 1504 and 1505, caused a sensation throughout Europe. In them he postulated that the landmass he had helped explore on his Portuguese venture was not the eastern coast of Asia, as thought by Columbus, but rather an unknown continent, or as he put it: a New World. A German map maker working in France, Martin Waldseemüller, and his assistant, Matthias Ringmann, having read the letters, made the first atlas including this new world in 1507. In the introduction, mistakenly believing Vespucci to be the discoverer, Ringmann wrote that they were naming it for the Latinized version of his first name but using the feminine ending to conform to the known "worlds" of Europa, Asia and Africa. Near where Iguassu Falls is located today the cartographers placed the word America.

Brazil is the largest country of South America, occupying 47% of the continent and containing more than half its people. Brazil is so big that it borders every nation of South America except two (which two? you may well ask - that's a good trivia question – answer: Chile and Equador). Brazil is by far the largest economy of Latin America, the second largest in the Americas and seventh in the world. It has a vibrant democracy, a thriving intellectual life, a creative and inviting culture and vast industry, agriculture and natural resources. Above all, it has hard-working, fun-loving people committed to the values of free-enterprise. In a country settled by immigrants, Brazilians celebrate their diversity yet are unified by a powerful sense of national identity, not unlike the United States. Why, then, is Brazil so troubled?

Just a few short years ago Brazilians were looking optimistically to the future. The Great Recession of 2008 hardly touched Brazil. From 2006 to 2010 Gross Domestic Product rose at an average annual rate of 4.5%, according to the World Bank. Commodity exports, especially oil and iron ore (Brazil is the world's third biggest producer), fueled by rising demand from China and higher prices, rose to record levels, accounting for two-thirds of Brazil's trade in the last decade. This incoming tide raised most ships in the harbor. With one of the world's greatest disparities between the haves and the have-nots, from 2003 to 2014 Brazil lifted 29 million people out of poverty, shrinking the poverty level from 17.3% to 7.4%, while extreme poverty decreased from 9.7% to 4.3%. The poorest 40% saw their real incomes increase 7.1% between 2003 and 2014 compared to 4.4% for the rest of the population, a notable national achievement. But mere statistics cannot convey the profound improvements in quality of life for tens of millions. Late-model cars motored down the highways, new bathrooms were built, old kitchens remodeled and two-working-adult families who a few years before had only dreamed of owning their own home could now afford one. A feeling of satisfaction and accomplishment pervaded the land. Despite lingering pockets of poverty, most Brazilians never had it so good.

Yet on the eve of the Olympic Games in Rio when it should be putting its best face to the world, Brazil is searching for answers in a society torn by economic distress and mired in political turmoil. Problems began with a shrinking economy and growing inflation. When commodity prices declined, so did Brazil: annual growth slowed to 2.1% between 2011 and 2014. Gross Domestic Product fell 3.8% in 2015 and is on course to decline another 4% in 2016, the greatest downturn in over 80 years. If there is a decrease again in 2017, as many economists predct, it will be the first three-year contraction since 1901. At the same time inflation has been on the rise, reaching a current level approaching 11%. (The older generation still remember the frightening hyperinflation of the 1970s and 1980s when Brazil pursued an expansionist monetary policy to fund building a new capital city, Brasília, and the middle-class saw their savings destroyed.) Unemployment has increased to nearly 11%, the highest level in seven years, and hundreds of thousands of young Brazilians coming into the workforce can't find jobs. The nation with the second largest population in the Western Hemisphere, over 200 million, is being squeezed between recession and rising prices. Adding insult to injury, Brazil's debt was down-rated by Standard & Poor's to junk status in September, 2015. The country of the future just never seems to arrive. What went wrong?

First, Brazil has been too dependent on commodity exports. When China, Brazil's largest trading partner since 2009, slowed down so did Brazil and the decline was exacerbated by a steep price drop in both agricultural products (frozen ground beef, soybeans, corn, coffee, sugar) and in oil and iron ore. Second, Brazil has a closed economy. It has the world's highest tariffs on imported consumer goods and the second highest on capital goods. Third, most of its trade agreements are with protected trade zones. For example, Brazil is the leading member of Mercosur, whose other members (Argentina, Paraguay and Uruguay) have all wrestled with struggling economies, due at least in part to a heavy reliance on commodity exports. Contrast Mercosur with another trade group, the Pacific Alliance, whose members (Chile, Columbia, Mexico and Peru) export mostly value-added manufactured goods and thus have not been as vulnerable to a commodities contraction.

Closed economies are inherently less efficient than open economies. Barriers that keep out competitors erode productivity in domestic industries, reduce export capacity and raise prices for that country's consumers. There are few incentives for protected businesses to seek greater efficiency when they can keep prices high without concerns about competition. Removing barriers to entry encourages productivity which in turn leads to lower prices. Except for agriculture, where fertilizers have increased yields and mechanization has lowered labor costs, the difference in Brazilian productivity compared to other advanced economies is breathtaking. In 1980 Brazilian and South Korean workers produced at nearly the same value level. Today a Brazilian worker takes three days to produce what a South Korean produces in one. An even more striking contrast is with China. In 1980 a Brazilian worker produced at ten times the level of a Chinese worker; today they are just about equal.

This is not to say that Brazilians are not hard-working. Spend ten hours a day as a gardener under the hot tropical sun and you'll know what hard work is. Rather, Brazilian businesses have been stifled by burdensome regulatory barriers to entrepreneurship and choked by high local and state taxes. Add to this the increase in low-productivity labor-intensive services, such as education, health care and retail sales, which have risen from 51% of the workforce in 1996 to 59% in 2015, as well as relentless growth in the public sector which has remained stubbornly inefficient, and Brazil's productivity gains are unlikely to exceed two percent over the next three years, economists at bank Credit Suisse estimate.

Looming over everything is Brazil's federal government with economic policies that pander to a highly fractured electorate amid recent sensational revelations of massive political corruption. Under the social spending policies of the left-of-center Workers' Party (PT), which ran the nation for 13 years until the suspension of President Rousseff in May, the federal deficit swelled from 2% of GDP in 2010 to 10% in 2015. Government debt is now 70% of Gross Domestic Product, high for a middle-income country. Private pensions are dangerously underfunded and welfare benefits at 13% of GDP are exceeded only by Italy among the G7 nations, one more reason for the downgrade of Brazil's debt.

Difficult as the economy has been, what has infuriated people the most are nearly daily disclosures of political criminality so pervasive that even citizens of this country are stunned. Brazilians are used to crooked politicians. In 2005 there was the mensalão, or monthly payments scandal, in which the PT paid the equivalent of $12,000 per month to key members of the congresso to ensure their votes for social legislation that the popular former president, Luiz Inácio Lula da Silva (popularly known as Lula), was promoting. In Brazil no single party controls congress: no less than 28 political parties, alliances of economic and social interests, are represented, more than any other democracy. Consequently, the president must cobble together a governing coalition to pass any legislation, similar to many parliamentary systems. Several members were tried and convicted for the mensalão, and this time they got jail time instead of the usual slap-on-the-wrist fine Brazilians call a festa da pizza, the pizza party.

Then, two years ago in a plea bargain a petty money-launderer spilled the beans on the petrolão, which soon made the mensalão look like pocket change. He had been an intermediary concealing the origin of enormous kickbacks from nine major construction companies in a complex scheme to obtain inflated contracts amounting to billions from Petrobras, the state-controlled oil company. Where did all that money go? Not only to Petrobras executives and directors but also to members of congress, he said, to influence contract awards. And who was Chair of the Petrobras Board of Directors from 2003 to 2010 while this graft was going on? Why, none other than the former Energy Minister who was now the President of Brazil, Dilma Rousseff, the first woman to occupy the office, though she has not been accused of any crimes. Adding to Brazilians' disgust, the highly regarded former President Lula has also been implicated, although he has denied all charges. So far, almost 200 prominent executives and politicians have been indicted and nearly 100 tried and convicted. As the investigation, known as operacãlava jato (Operation Car Wash) has widened, led by Brazil's powerful independent judiciary, dozens of members of congress have been incriminated, including the speaker of the Chamber of Deputies, congress' lower house, who was suspended by the Supreme Court after it was revealed that he had stashed millions in Swiss bank accounts. (Only Brazil's highest court can set aside or charge federal legislators or cabinet ministers.) He was eventually arrested, tried for bribery, convicted and imprisoned.

Public anger against the government was so great that the largest party in Dilma's coalition pulled out, followed by several smaller parties, leaving her without a firm political base in congress and setting up a scenario for impeachment. Unable to link her directly to the Petrobras scandal, the opposition accused her of illegally manipulating budget accounts by secretly borrowing from state banks to implement an unauthorized spending program prior to her reelection in 2014. Last April she was impeached by the Chamber of Deputies (whose members appealed to God, country and motherhood - not always in that order - and where over half the deputados are now implicated in the lava jato affair) who were shocked – shocked. In May the Senate voted 55–22 to initiate a trial to remove her from office and she was required by the Constitution to step down for six months or until its conclusion. Since 54 of the 81 senators are needed to convict, her political career is probably over, though in Brazil one never knows. In her place vice-president Michel Temer took office as acting president. The only problem is that he and many of his political cronies, including some members of the new cabinet, are also under investigation for corruption. So it goes.

But yet...and still...any visitor to Brazil hears the hypnotic rhythms of beautiful music resonating from nearly every balcony, storefront, car and truck. Smiles and greetings between friends and strangers alike are commonplace. Sweet baked goods sell briskly in every padaria, along with café maravilhoso. The delicious smells of churrasco (char-grilled meat, chicken, pork and sausage) fill the streets and laughter fills the air. Brazilians have tasted the good life and are not turning back. Undeterred from pursuing the national motto enshrined on the flag, ordem e progresso, their bravery and fortitude are greater than any passing economic hardship. And to the finest politicians money can buy Brazilians laugh with flashing white teeth: “Do your worst and we will do our best. We, not you, are the heart of the people.”

And now, let the Games begin!   

 

The author lives in Brazil with two Brazilians, his wife and daughter, who often tell him imaginative stories of their colorful lives, some of which he actually believes. He is currently working on a non-fiction book titled "How To Live, Love And Laugh In Brazil".

 

August 4, 2016