Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (44 page)

“It's an environment that encourages original research,” says Luiz Abreu, general manager for Brazil and South America at Ultradent. . . . “Brazil always attracted our attention because it is the third or fourth country in the world in terms of numbers of articles published in orthodontic journals,” he says. “But since we arrived . . . we've got closer to that reality and seen that Brazilians really contribute new ideas, especially in combining more sophisticated materials with less invasive techniques.”
24

As the
Financial Times
concludes,

Not all conditions in Brazil are ideal for innovation, however. Just as notorious as the country's inequality is its stultifying bureaucracy. Ultradent's Tilos range, developed by Brazilians, is on sale in the United States, Europe and Japan but not Brazil.

“We can develop new products, but our product registration process is one of the most complicated in the world,” Mr. Abreu says.
25

Within a year or two the new technology developed by Brazilians will be available for use by Brazilian dentists.

Another of the troubles with Brazil, closely linked to the ponderous bureaucracy, is the surprisingly high cost of employing people in Brazil. A common misconception of people planning to set up business in Brazil is that the country has a cheap workforce. This is a reasonable extrapolation from the fact that slightly less than 64 million of Brazil's population, the so-called D and E social classes, working class and poor earn less than U.S. $9,880 per year (U.S. $760 per month). But while there is a lot of poverty in Brazil, that does not translate into cheap labor.

For one thing, payroll taxes in Brazil are extremely high. Your actual costs to pay someone R$10,000 per month would be more than R$20,000. Compounding that, you are obliged by law to pay every employee a bonus of a thirteenth month's salary each year. So instead of calculating your annual employment costs by multiplying a month's salary by 12, you must multiply by 13. The higher up the skills scale you go, the more expensive compensation is in Brazil. As reported by Moises Naim in the
Financial Times
, “the salaries of executives in São Paulo are higher than London.”
26
The “Custo Brasil,” or Brazil cost, is such that Brazil tends to be, as Joseph Leahy reported in the
Financial Times
, “a low-margin market in terms of profitability, particularly for companies in the start-up phase.”
27

The employment taxes and social benefits mandated in Brazil are so steep that state and municipal governments looking to save money sometimes evade the social contributions mandated by law. By failing to pay their withholding taxes, pension contributions, and other levies, the lower levels of government can cut their current costs drastically, but at the expense of creating multiple liabilities in the future.

Notwithstanding the great strides achieved in modernizing the Brazilian economy as reflected in the acceleration of growth in recent years, Brazil's potential continues to be stunted by heavy-handed bureaucracy, endemic corruption, and the highest real interest rates in the world. Within the past few years, the surge in real incomes has lifted approximately 40,000,000 Brazilians into the new middle class, creating the basis for the emergence of consumer credit on an unprecedented scale. Per the
Financial Times
, “Mean household income has grown by 1.8 percentage points above gross domestic product (GDP) per year since 2003—the reverse of China, where GDP growth has grown above household income by two [percentage] points a year.”
28

In other words, the more rapid growth of income in Brazil shows that Brazil's economy is more dependent upon consumption and has a much lower investment rate than China's. As Shannon O'Neil, author of
LatIntelligence
observed, China's growth has been investment led:

From 2000 to 2008, China invested an average of 41 percent of GDP, a ratio more than double that of Brazil (and other countries such as the United States). In 2009, in the depths of the worldwide global downturn, investment soared to almost 50 percent of GDP, much dedicated to infrastructure. Thousands of factories, millions of miles of road, new ports, high speed railway lines, and airports have sprung up over the past decade. The country is now populated by entirely new cities and manufacturing centers that then drive growth.

Brazil, by comparison, invests less than 19 percent of GDP a year. Infrastructure is notoriously bad—which some economists estimate will curtail future growth by nearly 1 percent a year. Instead, consumption fuels Brazil's recent rise. In 2009 a whopping 84 percent of GDP was consumption—compared to . . . just 13 percent in China. Brazil now ranks at the top of the list of the world's best shoppers led by booming credit, the expansion of foreign and domestic retailers, and the now 100 million strong middle class. The current over-reliance on consumption leads economists and policymakers alike to worry about overheating.

Furthermore, China's transformative growth has been mostly self-funded. It leads the world in internal domestic savings, which has risen steadily since the turn of the 21st century and in 2007 topped 54 percent of GDP, dwarfing the 23 percent average rate of OECD countries.
29

Many economists who have studied Brazil suggest that “the best way to fund investment is to increase the efficiency of the public sector.” While I know of no direct study estimating losses to Brazil due to government corruption, the famous
tangetopol
(or “bribesville”) analysis in Italy showed losses equivalent to 7 percent of GDP. According to the Corruption Index compiled by Transparency International, Brazil is only slightly more corrupt than Italy, ranking 73rd, as compared to 69th, on a descending scale.
30
If you adopt the not-unreasonable assumption that corruption costs Brazil 7 percent of GDP, it implies an annual loss in excess of US$150 billion. Curtailing that corruption could, in theory, free enough resources to raise Brazil's investment rate to 25 percent.

One way or the other, the best opportunity for improving long-term growth prospects is to curtail corrupt and inefficient government. According to Harvard University economist Ken Rogoff (co-author of
This Time Is Different
, quoted in Leahy's
Financial Times
article, “the government has grown inexorably, which makes it less flexible. . . . That's a weakness, I think it's actually
the
weakness in the model.”
31

Brazil, like the United States, is highly consumption oriented. It is, after all, an “American” economy. Although a formal rendition of “shopping center” into Portuguese would be
centro comercial
, the common term for a shopping center in Brazil is
um shopping
. They turn the American adjective “shopping” into a masculine noun.

A recent visit to a major Brazilian shopping center underscores the familiar-but-different character of Brazilian consumerism. One thing that immediately strikes a visitor is not just that a shopping center is
um shopping
, but the fact that many Brazilian retail outlets trade under English names: BrooksField, Basic Blue, Handbook, Sketch, Authentic Feet, Track & Field. These were just some of dozens of English-language brands calling to Brazilian shoppers at B.H. Shopping in Belo Horizonte.

As I entered Mr. Cat shoe store to explore sale prices on comfortable Brazilian shoes, I heard the lyrical voice of Bruno Mars crooning the unofficial anthem of consumerism everywhere: “Billionaire.”

Something else you would soon notice in
um shopping
is the tremendous difference in the quality of customer service in a Brazilian shopping mall as compared to one in the United States. Decades of stagnant income in the United States have dictated a strategy of cost-cutting as a primary focus of successful retailers. Consequently, when you enter a store in the United States you can generally wander the aisles unnoticed and unmolested by sales personnel. Typically, when you select products to buy in the United States you must then stand in a long line waiting for someone to take your money. Not so in Brazil. When I entered the Mr. Cat shoe store, I was one of four customers being attended by five sales personnel. Something you must get used to in Brazil is the eager attention of sales staff now employed in record numbers in the hope of encouraging you to buy.

Surging income, along with the reform of the bankruptcy laws, has helped accelerate the boom in Brazilian consumer spending. But the fact that many of the new middle class really are new to credit creates a worrisome potential for short-circuiting the boom. For one thing, the growth of consumer credit has helped drive the surge in imports of durable goods, such as home appliances from China. Consequently, the 30 percent improvement in Brazil's terms of trade arising from the global commodity boom has been diverted into consumption rather than savings or investment.

Just as Brazilians who shift to an American-style diet tend toward obesity, so Brazilians who indulge in U.S.-style credit abuse may face considerable difficulties. The dangers of overindulgence in credit are even greater in Brazil than in the United States because Brazil has the world's highest interest rates.

As of May 2011, the average rate of interest on consumer lending in Brazil jumped from 41 percent to an astonishing 47 percent, and the average interest rate on signature loans reached 147 percent. With interest rates at that level, amounts owing double in little more than the blink of an eye. As you would expect with rates this high, however, most loans are short term. Thus the inflection point where Brazil's credit cycle turns sour figures to be much nearer the starting line than it is in the United States, where the average interest rate on consumer credit cards on July 15, 2011 was 16.43 percent.
32
With Brazilian interest rates almost three times higher than those in the United States, it is little wonder that three Brazilian banks are among the world's 10 top credit card issuers: Itau-Unibanco, Bradesco, and Banco do Brasil.

Partly because Brazil does not have a level of consumer credit reporting comparable to the United States, Brazil's consumer credit laws permit more ready garnishment of wages than do the laws in the United States. (About 60 percent of consumer loans in Brazil are secured against payrolls, cars, or property.) For this reason, the current exposure of Brazilian banks to bad consumer debt is less acute than it would be under American laws. Nonetheless, delinquencies in Brazil (in excess of 15 days) have moved up rapidly, rising from 7.8 percent to 9.1 percent of total loans in the first five months of 2011. According to a separate analysis by credit rating agency Serasa Experian, delinquencies rose at a 23 percent rate through June 2011.
33

Of course, sky-high interest rates still being paid by more than 90 percent of borrowers provide substantial coverage against losses for the banks. The most worrying aspect of the deterioration of credit indicators is that they are occurring in an economy that has remained strong and where unemployment is at a record low. As Paul Marshall observes,

Normally credit indicators cyclically follow [read lag] the economic cycle. When they begin to deteriorate before any economic weakness, it usually represents a structural problem relating to underlying cash flow or underwriting weakness in the quality of credit—Brazil has both problems.
34

The combination of high nominal and real interest rates in conjunction with growing delinquencies implies that Brazil's credit cycle will be unnecessarily short. Even if Brazilian families, many unaccustomed to handling credit, do not mind devoting 20 percent of their current income to pay the debts from the previous spending spree, the expansion of high interest consumer debt in Brazil is nearing its limits. This implies a slowdown ahead.

While increased consumer credit and consumption are mechanisms to facilitate popular participation in economic growth, Brazil must increase its investment to continue to grow robustly in the future. As true as this is, it would be a mistake to ignore the fact that Brazil has already made crucial investments that put it well ahead of the United States particularly in the important field of energy. As you will be well aware, American politicians have been jabbering on for decades about the importance of achieving energy independence. In Brazil, this is not a daydream, it is a fact.

Brazil is not only energy independent, it has gone much further than the United States in developing so-called alternative energy. Brazil is the world leader in biofuels. It is also right at the top with 82 percent of its electricity generated through renewables. The figure for the United States is 11.14 percent.

Speaking in support of his scheme to spend trillions to double the percentage of U.S. electricity generated from renewable energy, no less an authority than President Barack Obama proclaimed, “We know the country that harnesses the power of clean, renewable energy will lead the twenty-first century.” Wittingly or not, Obama endorsed Brazil as the country of the future where energy is concerned. The promise that the United States will generate a significant percentage of its electricity through “clean, renewable energy” is reminiscent of Obama's promises to end unemployment and balance the federal budget, but the promise of renewable energy in Brazil is not pie in the sky. It is here today.
35

Not only is renewable energy generation installed on a large scale in Brazil, it pays a hefty yield. CIA Energetica de Minas Gerais (CIG; recent price: $17.55) operates 54 hydroelectric generating facilities, in an array of low-cost, renewable assets that includes three thermal plants and two wind farms. While U.S. politicians talk about building the system of the future around “clean, renewable energy,” CEMIG (as it is known) powers a state larger than France almost entirely with renewable generation that involves scarcely any hydrocarbon fuels.