2016, it should have represented the crowning of Brazil as a major economic superpower.
The country's industries were going at some of the fastest rates in the world and had
overtaken India and Italy and was closing in on France and the UK by pure economic output.
Life expectancy, access to healthcare and education, average incomes, investor confidence,
political stability, global influence, social mobility and even its currency value were
all on the up and up.
Beyond just its domestic success, it was promising to be a major regional hub that could lift
up the rest of South America by presenting a major local consumer market and trade partner.
But by 2016, that was gone.
The Olympic Games, which should have been a way to showcase the Brazilian success story
to the world, turned into a global embarrassment.
Facilities were barely constructed in time, the arenas were surrounded by waste and the
immense cost to host the games bankrupted the city and then the public servants needed
to accommodate the games were on strike while not getting paid.
Now the economic dynamics of the Olympics are a problem in and of themselves, but they've
always been away for countries, to Spotify or otherwise, to put their best foot forward
on the global stage.
If this was the best that Brazil had to showcase, it spoke to the major challenges the country
was facing, challenges that had not gotten better since.
Since its peak, the country has lost almost half of its GDP and that's having a tangible
impact on every other improvement the country made over the 2000s.
The country has now also been mined by corruption scandals and tainted by political instability
which will make regaining that success all the more difficult.
So how is Brazil able to become one of the fastest growing economies in the world?
Why did it all collapse so quickly?
And finally, does the country have any chance of reliving the success of the early 2000s?
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Brazil's modern economy has been defined by the challenges it had to overcome that
most recently came to a head in the 1990s.
The beginning of the 90s saw Brazil take on the serious obstacle of hyperinflation reaching
56% in January alone, 73% in February and 84% in March that first year.
With mounting pressures and little time to spare, the Brazilian government was forced
to take drastic action, freezing prices, opening up investments and trade and ultimately making
the decision to privatise certain industries that have become highly inefficient thus allowing
them to encourage productivity.
Another action of note in Brazil's parliament was to call a ban on indexation, which was
a system that automatically increased people's wages in line with inflation.
Of course this sounds a bit cruel for the working man, but it slows down to something
called a wage price spiral where workers wages go up so businesses have to increase prices
to remain profitable.
A general increase in price is inflation so that automatically pushes wages up which repeats
the whole cycle leading to spiralling wages and prices.
Now it's important to note that every economy has raising wages to keep up with inflationary
measures so a wage price spiral can happen without indexation, but that's not the problem.
The problem is when a system like Brazil's indexation automates these dramatic changes
it can make the whole process a lot faster and a lot harder to control.
So after making these alterations Brazil moved on to another phase called the Plano
Real anchoring the economy to a separate distinct unit of account to reflect relative prices
as the currency had lost its function because normal prices were increasing too fast.
By 1994 following a series of devastating inflationary losses the government of Brazil
introduced a new currency, the Real.
This was not the first time the currency had been replaced like this since the country
gained independence.
Hyperinflation was a common occurrence in Brazil up until this point.
So much so that if the current currency was traded back through the previous currencies
it would be exchangeable for 2.75 quintillion of the country's original Real.
So the country needed something a little bit more than new paper rectangles to convince
economic participants that this time would be different.
Fortunately Brazil is massive with a total land area over 8.5 million square kilometers
and on that vast land are vast amounts of resources.
It also doesn't hurt that their workforce stands at a staggering 108.4 million.
Almost all of them are incredibly cheap highs so it had a lot of easy exports and cheap
labour to process those exports.
Now of course Brazil was an export-led economy to begin with but it received a significant
boom starting in the year 2000 thanks to its new more stable currency, more productive
privatized industries and most importantly huge demand for its natural resources coming
from a rapidly industrializing China.
Before the boom Brazil was in a series of crises.
Constant political instability and corruption paired with the mismanagement of funds made
it an undeveloped economy but this radical rise in exports made it look more like an
advanced economy within a decade.
Also while major countries scrambled desperately to handle the 2007 and 2008 global financial
crisis or GFC dealing with the consequences of unregulated financial institutions, Brazil
managed to insulate itself after the initial hit by relying on said export of raw materials
primarily to China which had just initiated a colossal economic stimulus plan amounting
to $586 billion.
That money went to fund a massive building spread to dig China's way out of the crisis
and it meant it needed raw materials which it got from places like Canada, Australia
and Brazil all of which are countries that actually did okay during the GFC.
It also didn't hurt that Brazil's financial sector was relatively basic at the time having
only been rebuilt in the early 2000s after the hyperinflation crisis.
So it avoided the fallout that came from messing around with the advanced financial instruments
that blew up the financial sectors in the USA and Europe.
In fact its GDP only fell by 2.9% in the last quarter of 2008 and then by 0.9% in the first
quarter of 2009.
From then onwards the economy quickly returned to strong growth.
By sheer coincidence just two years before the GFC Brazil had finished carving out a
portion of the Amazon rainforest the size of California for natural resource extraction.
This is for many reasons a controversial and ongoing method for extraction but it did
lead to rising profits.
In these areas there was a veritable cornucopia of valuable materials including iron ore,
bauxite, manganese and gold not to mention the lumber itself which was also a valuable
export.
It also discovered what is popularly known as the 2B oilfield the largest recently discovered
hydrocarbon source in the western hemisphere.
This find contained 8 billion recoverable barrels of oil.
In other words this was the discovery that allowed Brazil to transcend from a notable
regional player to a total powerhouse albeit with all of the political turmoil that often
comes with it.
This begs the question, if Brazil found its way out of the largest economic crisis in
modern decades with massive amounts of natural resource both on sea and land what caused
the crash?
Well as much as I try to avoid it this is where the politics come into play and the picture
isn't pretty.
It all comes down to the woefully dark side of regional governance.
Brazil is made up of 26 federative units with 26 states and one federal district.
The 26 states inhabit what are referred to as 5 regions, North, North East, Central,
West, South East and South.
This may go without saying but when a regional nation state is cohesive collaborating for
the common good of the whole elected officials often act with a public interest at heart
regional governance can be a really good thing.
The USA for example has a lot of inbuilt diversity and redundancy in governance and economic policy
between its states so that one bad idea can't bring down the collective system but that's
if everything is working as intended.
However if this cooperation breaks down and there's a potential for easy profit related
to resources well now one lives in a system that serves itself.
For Brazil this all came to a head in 2014 when an infinitesimally small investigation
regarding money laundering at a local car wash ballooned into what some refer to as
the largest western political scandal in modern history.
It started with the arrest of Nesta Severo, a former executive of Brazil's national
oil company Petrobras, a mega corporation that many foreign investors wish to collaborate
with in the early 2000s.
This little arrest seemed simple enough, assumptions were made by both parties with Severo expecting
freedom by the morning and the arresting agents suspecting that Severo may face charges but
would eventually pay his way out.
But something strange happened, something neither of them nor the Brazilian public could
have foreseen.
When the first stone finally turned it became apparent that Severo was actually part of
a much larger network of corruption in Brazil.
A federal investigation fittingly codenamed Operation Car Wash would set fire to public
trust as dozens of high level politicians were indicted for embezzlement.
This was a travesty as Petrobras had previously been dubbed the largest enterprise and a symbol
of the country's entrenched economic nationalism.
By June of 2015, a massive scheme to defraud Petrobras on contracts to develop the so-called
pre-salt oil reserves found offshore in 2007 had appeared on investigators' radar.
Moreover, reports suggested that federal prosecutors were also looking into the electricity generation
sector, pension funds for employees and state-owned companies, and the National Bank of Economic
and Social Development.
It compounded with an investigation initiated in 2005 carried out by Brazil's public
ministry, the country's federal police, and the Brazilian Court of Audit.
The cash for votes case involved some US$43 million siphoned from taxpayer wallets.
And upon further enquiry, so much money was discovered to be stolen that lost faith in
Petrobras alone caused the Brazilian GDP to drop by 0.75% in 2015.
Some $2.1 billion was allegedly redistributed in this manner for the personal gain of the
scheme's operators and to finance campaigns of dozens of politicians.
The company's former director of refining and supply confessed to having received bribes
and agreed to pay back $23 million.
Watching an endless slew of corruption cases flood out daily not only undermined domestic
stability but international confidence in the country as a place to invest and do business
as well.
The problems continued when this event coincided with a drop in commodity prices which slowed
the country down even more and showed the whole country was basically only held up by
being able to export raw materials to economies that actually were building themselves up
in Asia.
Brazil was hit particularly hard by falling commodity prices because of the basic nature
of its position in the world.
Compared to Canada, Australia and Russia, Brazil has no direct sea routes to Asia without
crossing the Drake Passage, the roughest and most dangerous sea route in the world, or
going through the Panama Canal which has become very expensive with the authority increasing
tolls significantly even before the water crisis started.
When commodity prices were high and margins were healthy, this extra expense wasn't a
major issue.
But when they fell, Brazilian resources were the first to get cut.
This doesn't even address the other major element in the room.
The Brazilian landscape is vast with equally vast resources, but that itself comes at
a cost.
It's easier and much cheaper to transport raw materials over deserts or tundra like
Australia, Canada and Russia, but it's much harder to transport things through dense rain
forest.
It's also a nearly impossible problem to solve.
Various governments have made efforts to ramp up deforestation, but this comes with
yet another cost considering any efforts to expand the patchwork in the Amazon are often
greeted with global backlash.
In fact, the European Union stalled trade relations when Brazil made efforts to clear
a path, forcing them to try and reach another alternative.
An example of such an alternative would be the government's response by cutting interest
rates and raising spending, which is normally the answer to stimulating a slowing economy,
but that only works when the issue is consumer confidence.
It won't fix a fundamental problem with how the economy makes money.
As a result, Brazil witnessed the collapse of other local industries as a lot of money
left the country, and as is the case with any nation when the money leaves, skilled employees
often leave with it.
Some are calling it the Brazilian diaspora, but it essentially boils down to a devastating
brain drain, with Brazilian media reporting education and investment in science and research
has been an obstacle to the work of highly qualified professionals in the country, faced
with fewer resources, cutting edge researchers have been looking for better opportunities
abroad.
Many of the immigrants are finding their way to the US, but the country that issued the
most work, study and business visas to Brazilians was China.
According to the fragment data, the number of Brazilian immigrants moving to China has
increased by 321%.
Pension in the country of Paraguay also grew by 175%, with competitive university programs,
not to mention incentives for companies and tax cuts.
There is currently very little Brazil can do to retain its best present and potential
problem solvers, except for try and play the same game, one that isn't working in their
favour.
Lower taxes and increased spending have saddled the country with more debt, and the value
of the real has fallen, making it harder to service that debt through taxation.
Up to the present day, according to the Treasury, Brazil's central government posted a larger
than expected primary budget deficit in May, pressured by increased pension benefits.
Government spending also rose by 14% in real terms from a year earlier, driven by an uptick
in pension benefits compared to a 9% increase in net revenues.
Negative growth, higher government spending, rising prices, devaluing currency and lower
tax receipts are a dangerous mix, especially when compared to the situation the country
was in less than a decade ago.
The Rio Olympics is a perfect anecdote here.
Although the festivities look good momentarily for Rio and the rest of Brazil on paper, the
press had a field day when images came flooding in showing the aesthetic juxtaposition between
where the event took place and the slums around its borders.
Later reports came in regarding how they created enough space, and that didn't help the situation
either as journalists documented how impoverished families were kicked out of their homes, only
for them to be demolished for various competitions.
Of course, this sears representative of the ongoing crisis Brazil continues to grapple
with, tough living conditions of undermined political stability, perhaps best demonstrated
by the violent scenes in Brasilia after the last election and ongoing corruption scandals.
So with the flight of investors, the brain drain, the slowdown of exports, the collapse
of local industries and hordes of furious citizens, does the country of Brazil actually
have any chance of reliving the success of the early 2000s?
Well the short answer is yes, yes, it very well can.
Now of course, nobody can predict the future, least of all economists, but with all the
bells and whistles of the initial boom fading away, Brazil still has resource abundance,
which means the export game, though currently troubled, can experience a rebound effect in
the coming decades.
It also joined other nations to make the BRICS, an intergovernmental organisation comprising
Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab
Emirates.
This may seem from certain angles like a poor isolating decision to make, but it could make
it a preferred trade partner with China, which is still by far its biggest customer.
That said, from an economic perspective, avoiding confrontation and promoting mutual irritation
amongst rivals theoretically makes BRICS a masterful move, if done correctly.
The international pressure to counter the BRICS could also see favourable trade with
the USA, which presumably doesn't want any prominent rivals threatening the US dollar.
The country is also geographically much closer to Brazil, and itself is going to need a lot
of raw material to carry out the major infrastructure development it has planned through building
back better.
Growth is also returning after the pandemic, and even though it's a bit slower, that
might be okay.
Fast economic growth often isn't the most sustainable.
Slow stable economic growth is preferable over huge booms and busts.
So Brazil is a country battered and bruised by decades of political deception and economic
mismanagement.
It's a nation that, for all its boundable resources, has had much difficulty harnessing
this power for long periods of time, and it's a land that's lost the faith of many of its
people who are considering living life elsewhere.
That said, politics change with the winds of public interest.
Working harder to build back that stability and confidence can do a lot to let the country
live up to its very real potential.
If the BRICS strategy is approached with caution, exports can be revived and they are already
coming back stronger than ever.
And as for the brain drain, well, everybody talks about how they wish to seek life elsewhere,
but there is no place like home.
With major contributions to safety measures, infrastructure, housing and the like, there's
no reason Brazil can't, like many other countries, create an environment that encourages
up-and-comers to return to the fold.
Brazil has been through this cycle many times before, but just like there's no reason to
think that this time will be any different, there's also no reason that it has to be
the same.
Thanks for watching mate, bye.