BRAZIL AS AN ECONOMIC SUPERPOWER?

Understanding Brazil’s Changing Role in the Global Economy

BROOKINGS INSTITUTION PRESS

Copyright © 2009 THE BROOKINGS INSTITUTION
All right reserved.
ISBN: 978-0-8157-0296-2

Contents

Foreword Strobe Talbott……………………………………………………………………………………………………….vii1 Brazil: The “B” Belongs in the BRICS Lael Brainard and Leonardo Martinez-Diaz……………………………………………………..12 Brazil as an International Energy Player Ricardo Ubiraci Sennes and Thais Narciso………………………………………………….173 Brazil as an Agricultural and Agroenergy Superpower André Meloni Nassar………………………………………………………554 Brazil: The Challenges in Becoming an Agricultural Superpower Geraldo Barros………………………………………………………815 Brazil’s Trade Policy: Moving Away from Old Paradigms? Pedro da Motta Veiga……………………………………………………….1136 Brazil’s Trade Policy: Old and New Issues Mauricio Mesquita Moreira………………………………………………………………1377 Big Business in Brazil: Leveraging Natural Endowments and State Support for International Expansion Ben Ross Schneider…………………1598 Technology, Public Policy, and the Emergence of Brazilian Multinationals Edmund Amann………………………………………………1879 Income Policies, Income Distribution, and the Distribution of Opportunities in Brazil Marcelo Neri…………………………………..221Contributors………………………………………………………………………………………………………………….271Index………………………………………………………………………………………………………………………..277

Chapter One

Brazil The “B” Belongs in the BRICs

LEONARDO MARTINEZ-DIAZ AND LAEL BRAINARD

Brazil’s economy has yet again become an object of fascination and speculation for international investors, academics, pundits, and policymakers in the United States and Europe. As a country replete with natural resources, endowed with a large internal market, and home to dynamic and increasingly global corporations, Brazil has been famously anointed as a “BRIC”—thus identified along with Russia, India, and China as one of the four very large, rapidly emerging economies that are key growth engines of the global economy. Yet, coming only months after the International Monetary Fund provided a large loan to stabilize Brazil’s economy in 2003, Brazil’s inclusion alongside China and India in the BRICs was initially greeted with skepticism. Five years later, in April 2008, as the scholars who produced this volume gathered to debate Brazil’s prospects, the world’s major credit-rating agencies promoted the country’s sovereign debt to investment grade, an assessment that would be tested later that year by financial turmoil emanating from the United States and Europe. In Brazil itself, the confluence of strong global demand for the country’s major products, global successes for its major corporations, and steady results from its economic policies have strengthened confidence and even revived dreams of grandeza—the greatness that has proven elusive in the past. These dreams have been dampened somewhat by the global economic crisis, but many experts believe that Brazil will be one of the engines that will help pull the global economy out of recession in the coming years.

Brazil’s economic potential has been on display in the past. Between 1947 and 1962, the country grew at an average rate of 6 percent annually and was seen as one of the brightest stars in the world economy. During the so-called Brazilian miracle period (1968–73), the country enjoyed economic growth of more than 10 percent a year—among the highest in the world. Its industrial sector grew at almost 10 percent a year, and its agricultural exports almost doubled between 1962 and 1971. Yet the country’s star faded with the debt crisis in 1982 and the “lost decade” of the 1980s. Years of macroeconomic instability and high inflation followed.

In comparison with the Brazilian miracle of the 1970s, the country’s bright prospects appear to rest on a more solid foundation this time around. The country is now a stable, vibrant democracy—not a military dictatorship. It has enjoyed a sustained period of low inflation and conservative macroeconomic management, in contrast to the external-debt-fueled 1970s. The 2002 election and the subsequent leadership of President Luiz Inácio Lula da Silva have demonstrated that a left-wing candidate can win the presidency, navigate a sound macroeconomic course, and open the country’s economy to global trade and investment. Today, Brazil is more deeply integrated with the global economy than at any time in the past forty years. As figure 1-1 shows, trade now accounts for 25 to 30 percent of Brazil’s national income, up significantly from the 15 to 20 percent share of previous decades.

Brazil’s status among the world’s rising economic powers emanates from an auspicious conjuncture of external forces and internal strengths. The entry of hundreds of millions of people into the middle class in China and India has boosted demand for many of Brazil’s key agricultural and commodity exports, and Brazil’s resource wealth appears destined to grow with new oil finds. In parallel, a growing premium on reducing and sequestering carbon emissions to mitigate the adverse effects of climate change is increasingly favoring Brazil’s biofuel and hydropower sectors and may ultimately generate major transfers to preserve its environmentally crucial rainforests.

However, Brazil is not only benefiting from historically high commodity prices, which have proven to be fleeting. It is also benefiting from its sustained commitment to sound macroeconomic policies; from the strength of its corporations, which are achieving global success across a variety of sectors; and from the legacies of its policies on alternative energy and agricultural self-sufficiency, which were put in place in the 1960s and 1970s but are now delivering unanticipated benefits. For Brazil to capitalize on these advantages both during and beyond the current global financial crisis, it will need to address two main challenges. The first is to ensure that the benefits from its natural resource wealth translate into effective investments in education, infrastructure, and technology that will enable it to establish a foundation for sustained long-term growth. The second is that to achieve continued growth, it will need to steer a more consistent course on economic integration and on the governance of international markets. Brazil’s ambivalence on these issues manifests itself in an inconsistent and uneven position, especially on trade policy, which limits its ability to influence global rules and institutions in its favor.

External Forces: Climate and Commodities

Brazil’s growing economic heft in part reflects its ability to capitalize on two long-term global trends: strong commodity demand, driven by the swelling ranks of the global middle class; and the imperative of stabilizing the Earth’s climate. In recent years, commodity prices have soared, reflecting a combination of increased demand for food and raw materials from China and other emerging economies, strong energy demand from the United States and other advanced economies, and medium-term supply constraints. Brazil has emerged as a major exporter of many of these commodities, including soy (where Brazil has a global market share of almost 40 percent), chicken (30 percent), coffee (30 percent), beef (20 percent), orange juice (80 percent), and tobacco (20 percent). Brazil is also benefiting from the rising prices of iron ore and steel, because it is a leading producer of both, and it is poised to take advantage of rising energy prices.

Though commodity prices have softened in the current global financial turmoil, experts project strong demand over the horizon for the medium term. According to projections by the Brookings economist Homi Kharas, the ranks of the global middle class will swell by as many as 1.8 billion people over the next twelve years, so that by 2020 just over half the world’s population will enjoy greater disposable income than the previous generation. As more and more people adopt a middle-class lifestyle, sustained demand will be generated for those commodities and manufactures for which Brazil has a competitive edge, ranging from beef to regional aircraft.

In parallel, the imperative to stabilize the Earth’s fragile climate means that the world will increasingly put a premium on carbon-efficient energy sources and carbon sequestration. Brazil is well positioned to capitalize on this trend, with the continued evolution of its biofuels industry, and its vast rainforests may become a magnet for significant international transfers when given their justly high value in a post–Kyoto Protocol climate framework.

Brazil is well positioned to benefit from these two medium-term trends, in part due to a favorable resource mix. The country contains the world’s largest and most biodiverse rainforests and has one of the largest renewable reserves of freshwater. Its vast territory and varied climate allow for livestock farming and commercial agriculture on a large scale. Its mineral wealth is also considerable, particularly in iron ore. And if its recently discovered offshore oil and gas fields meet expectations, it will become one of the world’s largest producers of hydrocarbon fuels.

Internal Choices: The Policy Legacy

Yet, sustained growth and ascension to the ranks of the global economic powers has eluded many resource-rich countries. Why might Brazil succeed where others have failed? One possible answer is that the country is reaping the benefits from its legacy of policies that were intended to advance its self-sufficiency and autonomy from international markets but are now paradoxically conferring important advantages for engaging with the world economy as its leadership seeks to seize opportunities in globalizing capital, product, and energy markets.

The state has historically loomed large in Brazil’s economy. The country had one of the largest public sectors outside the former Communist bloc. In 1985, Brazil’s public sector accounted for just under half of the net assets of its 8,000 largest firms, for about a quarter of their sales, and for a fifth of their total employment. As late as 1990, before the administration of Fernando Henrique Cardoso began to privatize state-owned assets, 38 of Brazil’s 100 largest firms were still government owned.

Also prominent was the state’s role as business manager and economic planner. As manager of state-owned businesses, the Brazilian state has a mostly typical record, but one punctuated by prominent successes, especially in aircraft manufacturing, biofuels, and petrochemicals. In sectors such as informatics, the state played the role of what Evans calls a “midwife,” trying “to assist in the emergence of new entrepreneurial groups or to induce existing groups to venture into more challenging kinds of production.” This role was facilitated by a range of instruments, including protective tariffs, subsidies, targeted credit, and government help for local entrepreneurs negotiating with foreign investors.

For Brazil’s leaders, starting with Getulio Vargas in the 1930s, the animating motivation for state-led development policies was the drive to make the country self-sufficient and independent. In the manufacturing sector, the drive for autonomy was motivated by the idea that any country destined for modernity had to develop an indigenous capacity in certain industries, particularly in the heavy manufacturing and chemical sectors. In agriculture and energy, the oil and food price shocks of the 1970s provided an urgent impetus to diminish reliance on foreign suppliers. During this time, Brazil’s military government saw the drive toward self-sufficiency as a national security imperative, as a way of protecting the country in a world perceived as dangerous and uncertain.

The state-led development project came at considerable cost to the public purse and introduced ultimately debilitating economic distortions. The massive public financing of key sectors contributed to chronic inflation, which for decades would be the scourge of Brazil’s poor and middle classes. The state’s import-substitution industrialization strategy also involved extensive foreign borrowing, which created balance-of-payments pressures and often resulted in duplicative or excess investment. In the process of developing new products and technologies, the costs of failed experiments were often “socialized” and passed on to the public. The overall net cost of these policies, though difficult to quantify, was considerable.

Starting in the late 1980s, the Brazilian government began to dismantle many elements of the import-substitution industrialization policy framework. Trade was liberalized in a series of rapid, unilateral tariff reductions in the period 1988–89, and the removal of nontariff barriers followed in 1991–93. Average nominal tariffs fell from 57 percent in 1987 to 32 percent in 1999. At the same time, the Cardoso administration began a major privatization drive. Between 1991 and 2001, the government sold about $110 billion worth of assets, including the giant telecom Telebrás, and Brazil was dubbed “privatization’s poster child.” Nonetheless, the state has retained an important foothold in the economy; 13 of the top 100 firms are still state owned, including the largest company, Petrobrás.

Although Brazil’s past state-led development policies to promote self-sufficiency were costly and counterproductive in many ways, the legacy of some of these policies is now paradoxically providing a strong foundation for the country’s current generation of outward-looking political and business leaders as they pursue its global competitiveness. Policies put in place in the 1960s and 1970s helped to stimulate the agribusiness and biofuels sectors and to develop strengths in selected manufacturing areas. Through entrepreneurial vision, a number of Brazilian producers have been able to translate this policy legacy into competitive advantages in global markets now that the country’s policy orientation has turned outward and global demand has shifted favorably.

Technological Capacity

Several chapters in this volume highlight the notable involvement of the Brazilian state in technological development through investments in research centers and institutions. In chapter 4, for example, the University of São Paulo economist Geraldo Barros notes the importance of the Brazilian Agricultural Research Company (Embrapa), established in the 1970s, in contributing to develop the technologies that have helped Brazilian agribusiness double its total factor productivity since the 1975 and take advantage of new opportunities in global markets for agricultural products. In chapter 7, Northwestern’s Ben Ross Schneider credits two centers of engineering research and training (the Aeronautics Technology Center, or CTA, and the Aeronautics Technological Institute, or ITA) with setting the foundations for Embraer’s commercial success in aircraft manufacturing. In chapter 8, Edmund Amann of the University of Manchester highlights the role of the Petrobrás in-house research center, CENPES, in helping the company develop the offshore oil exploration and production technologies that are likely to make Brazil a leading oil producer. More broadly, these research centers are underpinned by a wider network of publicly funded state and federal universities and research institutes. However, it is difficult to know whether globally competitive producers would have emerged in these or other sectors that have proven less successful if the market had determined investment allocations.

From Self-Sufficiency to Export Strength in New Sectors

A second legacy came from the Brazilian government’s deliberate attempts to push firms into sectors they might not otherwise have entered, perhaps most importantly the energy sector. In response to the oil price shocks of the 1970s, the Brazilian government put in place a series of policies to pursue higher levels of energy self-sufficiency. As Ricardo Sennes and Thais Narciso of Prospectiva Consultoria put it in chapter 2, “It was not merely the case of adjusting the national economy to the international price shock; it was also an effort to render the development and security strategy sustainable within an increasingly hostile international environment where energy was vital. So crucial was the country’s strategy of development and industrialization to national security that it justified a thorough political, financial, institutional, and technological mobilization.”

As a result, the government invested heavily in hydroelectric power and undertook the Programa Nacional do Álcool (the Pro-Alcohol Program) to harness Brazil’s plentiful sugarcane harvests to the production of an indigenous, renewable, and relatively inexpensive energy source. These initiatives succeeded in significantly reducing Brazil’s reliance on oil imports and, over time, allowed the country to develop a qualitatively different energy matrix compared with those of countries belonging to the Organization for Economic Cooperation and Development (OECD) and other developing economies. Today, Brazil derives 46 percent of its energy from renewable sources, compared with a world average of 13 percent and an OECD average of just 6 percent. It also has the world’s largest infrastructure for the production and commercial distribution of ethanol. The unintended consequence of this policy originally designed to protect Brazil from oil-price shocks was to give the country a singularly strong comparative advantage in the production and export of sugarcane-based ethanol, a commodity now in high demand in a world of expensive oil and environmentally costly carbon emissions.

Triumphs and Limitations

A key question is what Brazil’s firms and sectors are doing and will do with this policy legacy and these corporate strengths. Here, experts highlight both the triumphs and limitations of the country’s key productive sectors. On the triumphalist side, Schneider applauds the former state-owned mining giant Vale for leveraging its legacy of scale and competent management to diversify geographically and along product lines after its privatization in 1997. Amann explains how Odebrecht, a construction services conglomerate, has used its innovative internal organization to mount a successful internationalization strategy. More broadly, in chapter 3 the Institute for International Trade Negotiations’ director-general, André Nassar, illustrates how Brazilian agribusiness has leveraged its legacy of investments in productivity to penetrate world markets, while Sennes and Narciso explain how Petrobrás has mobilized its legacy of deepwater exploration and production technology to mount a major international strategy with operations in twenty-six countries.

Yet important obstacles remain. In agriculture, Brazil faces challenges from poor transportation infrastructure, inadequate ethanol pipelines, and an uncertain legal framework governing genetically modified crops and land ownership. Amann worries about the country’s ability to continue building on its technological legacy at a time when government spending on science and technology is at its lowest level in more than a decade and the private sector is not increasing its own spending to fill the gap. As a percentage of gross domestic product, Brazil’s investments in science and technology now trail behind those of other emerging economies, including China, Russia, and South Korea.

(Continues…)

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