Does Brazil Die and Kill the World?

Anyone that has read my blog over the years knows that I am consistently optimistic about Brazil even in the midst of hard times and bad news.  So, the question is why the pessimistic title?

There are several reasons.  The Brazilian diaspora is taking off again.  People with brains and resources are seeking to migrate to the USA, Canada, Portugal, New Zealand, Australia, England and basically any place with more immediate opportunity.  The economy, in spite of reforms promoted by Paulo Guedes, who is attempting to reduce the size and impact of the public sector, remains stubbornly stagnant.  Brazilians have little confidence in their institutions and investors even less so.  In spite of Bolsonaro’s promises, both corruption and violence make living in Brazil a major challenge.  Inequality and the perverse income maldistribution have worsened with recession and stagnation.  Moreover, this lack of economic growth which should be cyclical is becoming structural and more deeply embedded.  Statistics show Brazilian manufacturing retracting.  The one bright spot in recent times had been Embraer, its supply chain and the export of Brazilian designed and manufactured jets, but with the acquisition by Boeing, Embraer production may move to the US and certainly Brazilians have lost control.  Other manufacturing is caught up in demands for protectionism which only tends to increase the competitive gap with advanced economies.  Instead of increasing complexity in the industrial sector, Brazilian companies are reverting back to the semi-industrialization of products.  Thus, Brazil is successful in pulp but not in paper, iron and not steel, generic pharmaceuticals and not advanced or innovative drugs, old model vehicles instead of first in the class.  Mexico has overtaken Brazil in both quantity and quality of automotive production.  Agricultural and the agroindustrial complex are the current darling, but instead of intensifying production and modernizing infra-structure, Brazil has opted for further expanding the agricultural frontier into the Amazon for soy and cattle.  The mid and long-term impacts lead to a legitimate concern about reaching a tipping point where fires, farms and cattle ranches affect the rain cycle creating droughts and a much dryer savannah or even desert.  Long term, many predict that the environmental impact will lead to massive climate change and apocalyptic consequences on a world scale.

So, Brazil’s involution has major consequences.  If the Amazon region is, in reality, a main determinant in climate change, Brazil can be viewed and, is indeed, criticized for its short-sighted management and goals, under the current government as it opens up mining, logging,  farming and generally invasive activities in protected areas at the expense of native populations and nature itself.  The consequence of this policy and climate change denial may be catastrophic in less than a generation.  Is Brazil setting itself up for an international intervention?  Is the paranoia of the Brazilian military and nationalists justified?  President Bolsonaro has reinforced the claims of sovereignty but will these be respected if the future of the whole world population is convinced that it is threatened by floods, fire, rising oceans and natural disasters related to the compromised Amazon region?

Brazil’s current stagnation is generally blamed on the irresponsible economic policies of the leftist governments of the 21^st century, and especially the disastrous administration of Dilma Rousseff.  Now Brazil’s offshore pre-salt oil fields with reserves of over 200 billion barrels should place the country in the very top tier of all oil producing countries.  However, it may be that this wealth could go waste.  Along with the destruction of heat sinks such as the Amazon, fossil fuels today are also viewed as the main culprit in climate change and the tipping to catastrophe.  Interesting the major oil companies want to become energy entities and are listening to a 16-year-old from Sweden (Greta Thunberg) while they consciously pursuing two parallel endeavors.

First, they want to produce and sell as much oil as possible while they still can.  Saudi Arabia’s Aramco is the world’s most valuable company and controls some 20% of the world’s traditional energy.  Aramco’s IPO will raise funds to continue and expand production.  Aramco’s cost per barrel and its level of production can almost dictate the world price of oil affecting directly other oil producers including Brazil and the USA.  While Brazilians are aware of the shrinking horizon for oil production, they lack the resources to quickly and effectively bring their oil reserves to the market.  The auctions this week took place without the participation of the major oil companies and raised a fraction of the resources that were expected.  The result is that Brazil’s production will be further delayed and that the country will have to offer more favorable terms to attract the participation of the majors.  Without them, the oil will stay in the ground and the country may miss this chance for wealth.

Aware of the move to alternative energy, the oil companies have jumped on the bandwagon.  Exxon, Shell, Total and the Chinese companies are all pursuing wind, solar, and other non-fossil fuel sources and not only playing lip service to the youthful protesters that Ms. Thunberg has mobilized.  Europe, American states such as California, the signatories of the Paris agreement have all accepted as inevitable the move away from fossil fuels.

The consequence for Brazil can be dire.  It is faced with a double whammy of the perspective of loss of resources from oil exploration and from possibly becoming a pariah state because of its Amazonian mismanagement and the loss of markets for its primary sector.  The market for red meat will shrink, the market for oil will shrink and Brazil may not even be able to sell its soybeans.  Already the European Community has threatened to put on hold the free trade agreement with Mercosur (mainly Brazil and Argentina) pending Brazil’s response in dealing with indigenous peoples and the treatment of the Amazon.

What are the options?

Mining?  The last years have been a disaster with death and destruction from the collapse of tailing dams.  In addition, with the slowdown in China and elsewhere the price of iron ore has fallen to less than half the high during the commodity boom.

Oil and Gas? Can Brazil adjust fast enough to the demands of the world markets.  I am not optimistic.  More than decade has been lost since Lula declared “self-sufficiency”.  Since then Petrobras has come close to bankruptcy and the legal framework for bringing investment to the sector is proving insufficient.  Changes can be made but oil alone is not Brazil’s salvation.

Manufacturing?  Brazilian industry with few exceptions is not competitive in the world market.  The best companies have already moved abroad.  Those companies that focus on the domestic market have to rely on food, drink and basic consumables.

Banking, finance and IT?  Brazil’s banks have long connived in an oligopolistic fashion.  FinTech’s, based on the IT revolution may have a future but their market share is less than 1% of all financial activity.  Information technology in Brazil plays no innovative or leading role in spite of the presence of Google, Qualcomm, Facebook, Linked In and others.  Unsurprisingly, Brazil’s best IT talents have already moved to the many “silicon valleys” where their talents are justly rewarded.  How many will return to Brazil?  Not many.

Employment and education? For the past 3 to 6 years, some 12 to 14 million working age Brazilians have been unemployed.  Without growth in industry and the increasingly mechanized nature of agriculture, few new jobs are available and most of these are in the service sector with low pay and high turnover.  Educational levels have remained low and the current administration by attacking science and the universities has not gained credibility even though it has promised to improve basic education, where Brazilian primary and secondary students consistently underperform compared to their peers in other countries.

Government? Traditionally, Brazil’s middle class has always wanted a public sector job and the role of politicians has been to provide these.  Now, everyone recognizes that the state no longer has any carrying capacity and as a result access and patronage are shutting down.

Tourism? Brazil is lovely and has many natural wonders and not only beaches.  However, Brazil’s image of corruption, violence and government venality has not helped.  And now, the oil spill in the South Atlantic, plus the lame Brazilian response to the clean-up have further compromised this sector.

Agriculture? Brazil will continue to export its primary products: coffee, orange juice, sugar, cotton, soybeans.  This is not enough to sustain its highly urban population (over 80% in cities of more than 100 thousand).

While none of this is encouraging, Brazilians are resilient.  Perhaps, the long tradition of improvisation may offer a way out.  Certainly, society needs to mobilize in a constructive fashion, but it may be that forthcoming protests (Lula released today) will lead to more tear down before things can be built up again.