Much of the attention goes to China for the next great economic power due to their abundance of human resources and a government committed to growth. At the present moment, China has already achieved a prominent spot on the world stage and must now focus on the internal costs of excessive growth in too short of a period. While a country of this size certainly has plenty of resources, China lags behind much of the world in commodities and will always be a net importer of raw materials. As the world focuses on their export based economy, few point out their dependence on trade for the raw materials required for growth. China’s rise has been a major contributor to the bull market in commodities this decade. Left out of this discussion, however, is Brazil. Let’s take a closer look…
China may be leading the world economy out of recession but Brazil is also on a roll. It did not avoid the downturn, but was among the last in and the first out. Its economy is growing again at an annualised rate of 5%. It should pick up more speed over the next few years as big new deep-sea oilfields come on stream, and as Asian countries still hunger for food and minerals from Brazil’s vast and bountiful land. Forecasts vary, but sometime in the decade after 2014—rather sooner than Goldman Sachs envisaged—Brazil is likely to become the world’s fifth-largest economy, overtaking Britain and France. By 2025 São Paulo will be its fifth-wealthiest city, according to PwC, a consultancy
And, in some ways, Brazil outclasses the other BRICs. Unlike China, it is a democracy. Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbours. Unlike Russia, it exports more than oil and arms, and treats foreign investors with respect. Under the presidency of Luiz Inácio Lula da Silva, a former trade-union leader born in poverty, its government has moved to reduce the searing inequalities that have long disfigured it. Indeed, when it comes to smart social policy and boosting consumption at home, the developing world has much more to learn from Brazil than from China…
In fact, Brazil’s emergence has been steady, not sudden. The first steps were taken in the 1990s when, having exhausted all other options, it settled on a sensible set of economic policies. Inflation was tamed, and spendthrift local and federal governments were required by law to rein in their debts. The Central Bank was granted autonomy, charged with keeping inflation low and ensuring that banks eschew the adventurism that has damaged Britain and America. The economy was thrown open to foreign trade and investment, and many state industries were privatised.
I must admit, I absolutely love the Brazilian economy going forward. While the government has enacted some curious spending and taxation policies, their economy is fundamentally sound. Commodity and manufacturing exports drive the economy but consumption is at a much healthier level than the United States or China. Credit flows through Brazil but is one of the few major economies not experiencing any sort of credit, real estate, or debt bubbles. Likewise, Brazil is not experiencing the deflation seen on the world scene but has controlled a steady inflation rate. They don’t spend on reckless military adventures and are generally at peace with their neighbors as the article explains. Best of all, they are virtually self sufficient. Oil reserves are high enough to sustain their living even if oil prices rise. They have plentiful supplies of sugar, agricultural products, water, and other critical resources. Their population ensures a critical human resources to stay competitive with the global economic powers.
The best part of the Brazil story is they’ve only just begun to realize their potential. Because they didn’t participate in the global credit bubble, they have plenty of room to expand consumption, housing, infrastructure, education, health care, etc. With their recent wealth expansion, they should finally begin investing in a highly prosperous country.
The reason I choose to post this article is that it is difficult to find sound economic models these days. Looking at global trends, I think Brazil offers an interesting investment opportunity but most importantly, a lesson to the rest of the world on economic management. While Brazil is blessed with wealthy resources, they have diversified their economy away from pure consumption to actually providing trade value in raw materials and manufacturing. This is how a sound economy is built but also how a sound economy is maintained. If the United States and China aspired to be more like Brazil in this regard, their policies would favor value creation rather than services and consumption. The United States has tremendous resources at its disposal and can utilize them effectively but instead chooses an unsustainable path toward quick wealth. Eventually the economy will correct itself, but like Brazil it would be nice to see the government finally wake up and turn the corner in its economic emphasis points.