Is it Time to Give Up on Brazil?

I have attended and spoken at plenty of events in Brazil, the US and other countries.  There is usually a favorable view (often tinged with condescension) of the Brazilians, mixed with suspicion about the country’s unique and complex socio-economic culture.  The conclusion has nevertheless always been that Brazil is too big to ignore and that it is a beautiful place temporarily bogged down by failures largely of its own making.

But perceptions about Brazil are changing along with its image.  Faced with a severely shrunken and stagnant economy, vast political disarray and a societal meltdown many Brazilians, both elite thinkers and average citizens are throwing in the towel.  Foreigners are doing the same in the face of street crime and wanton murder and mayhem occurring on a daily basis with further signs of deterioration.  A vague sense of hopelessness and despair mixed with resignation is the prevalent feeling.

The current round of plea bargains, secret recordings, denunciations, indictments and accusations do not leave any major figure in Brazil’s political elite untouched.  Passion and anger seethe and erupt in personal attacks on opposing sides in the streets, on airplanes, and in Congress and other forums.  President Temer stands accused of being the Godfather figure of Brazil’s biggest mafia.  Former Presidents Lula and Dilma and virtually all of their staff member have been unceremoniously brought in for depositions or labor under a cloud of suspicion.  Billions of dollars have disappeared in an almost uncountable number of schemes with little hope of more than a penny on the dollar ever being recovered.  While members of Brazil’s elite sit in jail and others are in line, the judicial system has also come under attack for partiality and corruption.  Dilma’s presidential opponent, Aecio Neves, was only recently removed from his Senate seat due to a compromising recording showing his long-suspected illicit activities.  So Brazil’s three powers: executive, legislative and judicial have little or no credibility among Brazilians.  The 1988 Constitution remains in place yet everyone recognizes that reforms are needed but cannot be made because of gridlock and lack of consensus.  Brazil’s streets show the obvious consequences with over 14 million unemployed, rampant growth of informal activities–semi-legal to totally illegal – street crime, crimes against tourists and the vulnerable and an upsurge of killings in territorial disputes by drug gangs and organized crime.

The picture is not pretty.  Is Brazil headed for a Venezuela-like crisis?

Possibly, but there is a contrarian view, not necessarily of optimism but something closer to opportunism and hope.  It is based on a larger story taking place outside the realm of institutional weakness and governmental breakdown.  There are different threads in this narrative.  Here are a few:

1. On the institutional level, the corruption scandals and their walk through the judicial system is actually purging Brazil, awakening consternation and revolt in civil society. In the long term, this will lead to resurgence and rebuilding.
2. As to the economy, Brazil’s bureaucratic and protectionist system has sorely tested national manufacturing. The companies that survive will emerge stronger and can be competitive in the international economy based on the creativity and dynamism.  Brazil’s natural resources, including agriculture, forestry, mining and much else, will also spur economic growth.
3. Just as the agriculture sector has modernized and now represents the growth sector of the economy, industry too can revive through specialization and a focus on innovation and competitiveness. The Brazilian market is large and Brazil remains a regional power in spite of the last years of decline.
4. Brazilians again are emigrating in significant numbers.  But many will inevitably return as was evidenced in the boom years leading up to 2014 and the World Cup.  Return migration brings advantages of skills learned abroad, entrepreneurship and investments.  Very few deny that opportunities abound in all sectors for those with eyes to see.
5. Foreign investors and so-called “smart money” is flowing into Brazil to take advantage of attractive valuations. These “capitalists” are not even necessarily betting on the long run.  They see opportunity for profit by buying at the bottom and selling on the inevitable recovery.  Foreign capital is flowing into traditional sectors such as oil and gas, mining, agriculture and even industry, not to mention innovative sectors such as alternative energy (wind, solar), education and online retail.
6. Social networking in Brazil ranks second or third after the United States on most measures of usage. While the separation of data, information and productive content remains a universal problem, the access to all types of information gives Brazil’s user population an outstanding opportunity.  Many Brazilians already are successful entrepreneurs in this sector.
7. Brazilians have always depended on a paternalistic and patrimonial state. But the collapse of the productive sector, the spread of corruption, and its institutionalization are creating and shaping the emerging perception that the model is no longer feasible.  This forces an awakening and perhaps a stronger drive to a more traditional liberal democratic model.  Of course, at this point, this is aspirational and the subject of ongoing debate.  Certainly given the disparities, supportive and corrective social policies in education and income distribution continue to be required.  A minority prefers socialism, perhaps something between Cuba and China, but there is no operational model of how this would work except for perhaps Lula’s first term which had little to do with socialism.
8. Although there has been a lot written about Brazil being lost, most thinking and informed Brazilians still want an orderly, constitutional, and regulated transition to a new government. Institution building is a slow process and it will only take place through the regular holding of elections and improvements in education and access to information. It is a sticky wicket indeed but still taking place slowly, way too slowly.

So in the end, it is not yet time to give up on Brazil.  It is still a beautiful and viable place in spite of its politicians and government.  More time is needed to transform hope into reality.  Defeatism is bound to lead to defeat.

 

 

Institute of the Americas: XXVI La Jolla Energy Conference

 

Since the early nineties, the Institute of the Americas at the University of California, San Diego campus has promoted an energy dialog bringing together top level executives, academics, consultants, hands on practitioners and journalists.  The exchange of information is always enlightening and the President and the staff of the Institute, especially Jeremy Martin, deserve kudos for promoting and organizing this important two-day meeting.

Here is the link to the event with the list of topics and of the distinguished speakers and panelists: https://www.iamericas.org/lajolla/

This year’s meeting could hardly have taken place at a better time.  The political economic crisis in Venezuela is ongoing, Brazil is in the midst of its second impeachment or presidential change in less than a year, Argentina’s new administration is seeking a more open and market oriented path for the use of its extensive oil/gas resources and suddenly, the small and often neglected Guyana is facing a surfeit of riches with the recent discovery of major offshore reserves.

The picture at the beginning of this text is of the panel: Brazil’s Energy Reset. On the left is Paulo Sotero, a journalist by trade and the Director of the Brazil Institute at the Woodrow Wilson International Center in Washington, D.C.  Seated with him are Rafael Ferreira of the state sponsored Energy Research Office and Andre Regra of Brazil’s regulatory ANP (Agencia Nacional do Petroleo).  Jay Thorseth, a Latin American Director for British Petroleum is between Andre and Rafael.

The perspectives from Brazil panel were quite representative of the other discussion at the Conference.  While each country has its particularities, representatives of the public sector, the private sector and academia or journalists showed unique perspectives.  Both Andre and Ricardo, for example, emphasized the reset of Brazil’s energy sector and hued pretty much to the government narrative.  Implicit in their presentations was the shift from a nationalistic PT (Brazilian Labor Party) perspective to greater market openness.  Both noted Brazil’s resumption of oil field auctions and the reduction of local content requirement that had previously put off many international investors and oil companies.  Jay Thorseth of BP, while polite and diplomatic, presented the private sector’s perspective, emphasizing the need for market realism.  Thorseth said governments need to favor foreign companies to be competitive and to access to capital, technology, knowledge and skills.  Auction and participation terms need to take into account Brazil’s need to be an attractive destination world-wide in terms of cost, profit and royalty payments.  If there are better deals elsewhere, then it is likely that the big oil companies or the so-called majors will favor these over a restricted Brazilian market.

Paulo Sotero started by remembering his previous writing on the major crisis and downfall of Brazil’s economic and political system.  This reminder, while obvious, became something of the elephant in the room.  Presenters with government ties were loath to recognize that their initiatives toward opening the energy sector depend not only on technocratic criteria but also on politics.  Thus, when Brazil’s President Temer departs, his replacement will reorder the chairs in the oil sector and in public companies like Petrobras and others in energy production and distribution.  Likewise in Mexico, President Pena Neto is in the last year of his term and essentially a lame duck.  If AMLO (Andres Manuel Lopez Obrador), a popular figure on Mexico’s left, is elected, Mexico’s energy reset will also certainly have a different orientation.   Representatives from Mexico’s public companies emphasized change in legislation in the hope of ongoing modernization and expansion of both oil and gas exploration and distribution in partnership with the private sector.  Optimistically speaking, resource nationalism is seemingly buried, but in Latin America it often rises phoenix like.  Private sector players must always be worried about institutional weakness as regulations and norms or the lack thereof thwart intentions.  Governments and businesses want to mobilize Latin America’s ample energy resources but this depends on the modernization, increased transparency, and durability of the rules of the game.  And these rules, in spite of promised advances, are still being negotiated.

The Conference provided a lot of detail on resources, processes, government action and private company plans.  The major discovery of oil in Guyana certainly will impact markets and already directly affects Venezuela and Brazil.

Finally, the presenters noted that even for traditional oil and gas players, alternative energy is now mainstream and has great significance and unlimited potential for development.  Nevertheless, petroleum and its derivatives will be the major source of energy for their economies for at least another generation.