WARNING: If you have no interest in business, investing, or geopolitics, this post will be the most utterly boring thing you have ever experienced.
As a good business student, I feel it is my duty to do some sort of investment analysis of the economic situation in Brazil. Actually I’ve had several people ask me about it - I think that recent events in the U.S. have led to increasing interest in the investment opportunities of the so-called “BRIC” countries (Brazil, Russia, India, and China), who according to virtually every economist and their mother are going to be the next big global powers.
Do I believe that Brazil will be one of the next generation global powers? The answer is obviously, clearly, without a doubt......maybe.
One thing is for certain: the issue is far more complex than U.S. News and World Report and CNN give it credit for. I don’t think the destiny of any country - for better or for worse - is lined with roses or guardrails. I believe that at any and every point in time, each country has the potential for greatness and for complacency, and the rise and fall of each is just as much a question of willpower and desire as some predetermined destiny.
So, what’s so complex about the issue? Here’s what Brazil’s future depends on:
1. How it puts its natural resources to use. Brazil’s natural resources are treated as if they were a golden ticket to prosperity, a giant buried “Get Out of Third World Free” card. We are reminded of the dwindling natural resources that threaten our growth, of the rise of voracious resource consumers like India and China that seem to suck up every last ounce of copper, steel, and manganese the world has to offer, and it seems logical that any country with the goods to sell can only benefit.
What people don’t seem to understand is that natural resources are not a guarantee of economic prosperity. In fact, they’re not even a good path to prosperity.
Economists call it Dutch Disease - the tendency for a country to actually fall behind economically when it discovers some amazingly rich source of some precious natural resource. It’s happened over and over and over: 16th century Spain; 19th century Australia; the Netherlands in the 1960s; and today in Azerbaijan, Chile, Malaysia, Ireland, and Russia. As counter-intuitive as this may seem, it’s really rooted in common sense and a basic understanding of business.
Let’s say that the world suddenly developed a huge appetite for pineapples. Everything was made of pineapples: people filled up their cars with pineapple juice, common everyday products were made of dried pineapple, everything from airplanes to cruise ships to industrial machines ran on pineapples. Now let’s say Costa Rica discovered a little-known valley deep in the jungle that grew nothing but pineapples. The soil was perfect, the sun hit at exactly the right angle, the humidity and pressure and temperature all caused prolific amounts of pineapple to grow.
What would happen?
Well, it usually goes something like this: the pineapples are extracted, juiced and minced for transport to the developed regions of the world. This is done by multi-national corporations, since of course they are the only ones with the expertise and capital to harvest such vast quantities of pineapple. These corporations do not employ local people, and if they do it is in low-level, low-skill positions such as picking pineapples, and thus no expertise or technology is transferred to the Costa Rican people.
But that’s okay, because the government is taxing these corporations heavily for the rights to extract such a precious resource, right? Well, yes. These huge revenues are being used to further inflate an already bloated pineapple bureaucracy, on unnecessary military toys, and on jailing dissidents who are crazy enough to think that forcibly removing the residents of Pineapple Valley is not okay.
Meanwhile, since this industry is growing so rapidly and has so much money to burn, it starts spending. It hires even more pineapple pickers, who can actually make more in the fields than in higher-skilled positions elsewhere. It buys real estate, builds roads and pineapple juice pipelines, constructs a fancy headquarters, even invests in telecommunications and shipping infrastructure in Costa Rica to support its operations.
All these things are good, right? All this spending supports other industries and pays the salaries of lots of poor Costa Ricans, right? Yes, but the problem is that it is all coming from one source, and the entire Costa Rican economy is reoriented to support this one industry. The entire economy and the livelihoods of nearly everyone become dependent on this one resource. Commodity prices are notoriously fickle: the price of pineapple may fluctuate wildly from week to week or may decline for long periods of time. This puts the economy on a roller-coaster ride reacting to every tiny movement in world markets.
But wait, there’s more. The pineapple extraction industry attracts all talent, investment, and government support. All the other industries - the orange, banana, and sugar cane industries - suffer horribly, as they see all resources being drawn to the “flavor” of the moment. Higher-skill industries - the conga drum, banana boat, and ukelele industries - are even more strongly affected. Why should the government, foreign investors, or locals invest time and money in these difficult skills that will only reap benefits far into the future? It is so much easier to just let the foreign multinational do it’s thing, look the other way, and live the high life.
Manufacturing, technology, and high-level service industries (which should form the backbone of long-term economic growth), stagnate as everyone goes crazy over pineapples. All these pineapples have to be bought, of course, in colónes (the Costa Rican currency), which means that everyone is exchanging their dollars and euros and yen for colónes.
What happens when demand for a currency goes up? The currency appreciates. What happens when a currency appreciates? Well, it would be a good thing for Costa Rican consumers because they could buy more imported goods with their colónes. It would be a good thing, that is, if they had any money. As it turns out, it just ends up hurting Costa Rican manufacturing, which finds the prices for its goods unreasonably high on the world markets.
Basically the conversation goes like this:
conga drum manufacturer (CDM): hey, want to buy some conga drums?
Japanese conga drum distributor (JCDD): how much?
CDM: 15 colónes each
JCDD: What!?!?! That’s a lot of money!
CDM: What are you talking about? That’s a rock-bottom price!
JCDD: With 15 colónes I could buy 3 of those freakin’ sweet pineapples.
CDM: stupid pineapples....
So there you have it. Instead of a shining future of never-ending growth and prosperity, you’re left with increased corruption, a larger bureaucracy, political strife, foreign control of your resources, stagnation in high-tech industries, an unstable economic climate, viscious business cycles, a lack of investment in long-term education and infrastructure, and rampant inflation that retards growth in exports besides pineapples.
Of course, this is a worst-case scenario. Some countries have been able to use their natural resources as a boost to more sustainable economic growth (obvious example: U.S. of A.). The difference is that in most cases these successful countries already had highly-developed high-tech manufacturing and service sectors, as well as accountable political systems.
Does Brazil have what it takes to turn its natural resources into a blessing instead of a curse? That is a question for which I do not have an answer, but how Brazilians deal with this question will ultimately determine whether they become a superpower or remain forever the “next great country.”
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