Scheherazade S. Rehman is a professor of international finance/business and international affairs at The George Washington University. You can visit her homepage here and follow her on Twitter @Prof_Rehman.
Brazil's meteoric rise has left many wondering what happens after the 2014 World Cup and 2016 XXXI Olympiad. Let me get two thoughts out of the way before we begin the discussion of Brazil possibly becoming the first Latin American superpower. First, we are only talking about an economic superpower and not a conventional superpower (i.e. military, political, and other soft powers.) Second, Brazil's prowess is in all probability destined to be contained to Latin America—a regional juggernaut.
Everyone is asking will it really be different this time or will Brazil remain trapped in the emerging market "black box?" I am using "black box" as a metaphor for "hotel" in the song "Hotel California" by the band Eagles…you can easily check in [into the hotel] but it is very hard to permanently check out. Most fast growing economies enter the "emerging market black box" and end up swaying up and down in the box and never graduating and maturing into highly developed countries. Something always happens (economic, political, financial, social problems or natural disasters) to prevent their exit from the emerging market black box into the developed country box. The exact lyrics to the Eagle's song are, "You can check-out any time you like, but you can never leave! " Very few have made it out permanently—Japan did.
Brazil's miracle is not that it is growing, but that it has grown so fast (albeit erratically) in such a short period of time. In a little over a decade Brazil's economy (its gross national product) grew by a multiple of five—from $0.5 trillion in 1999 to $2.5 trillion in 2011. Growth rates in terms of annual percentage change were about 4 percent in 2000, they dipped into negative territory in 2009 due to the global meltdown, and then rose to about 8 percent growth in 2010 only to slow down significantly in 2012 (forecasted at below 2 percent). "For a while, financial markets were engrossed in a torrid love affair with Brazil. In the aftermath of the crisis, capital poured into the country, bidding up asset prices."
For example, Petrobras (the Brazilian oil company) raised $67 billion in its stock market debut i.e. initial public offering. In the past decade Brazil has managed to radically improve its macroeconomic picture. With the help of foreign capital flooding local markets, Brazil's financial picture is currently healthy i.e. its public debt is manageable and world has given the country an investment-grade credit rating.
Yet, no one is sure exactly where this country will land a decade from now. The key question is "how fast can Brazil grow and for how long?"
There are too many factors complicating a reliable forecast of Brazil's economic trajectory into the 2020s. For example, serious problems of underdeveloped infrastructure—transportation is particularly critical for such a large land mass. There is lack of access to healthcare resulting in a significant infant mortality problem which, when coupled with abject poverty (about 20 percent in a population size of 200 million) and crime (24 homicides per 100,000 residents)—this paints a different picture than those portrayed in Latin American investment fund brochures. Housing and corruption are other consequential issues that need to be tackled. Other difficult to tackle troubling metrics are, for example, Brazil's rank in the World Economic Forum Competitiveness Index: "Brazil [is] 53rd—just ahead of Azerbaijan and Mauritius and behind Malta and Sri Lanka."
The critical indicator for Brazilian future developmental health rests on, among other things, how it will manage its future saving-investment balance—currently it is not well balanced with its growth needs. The country does not seem to have enough domestic savings to keep up the investment needed to maintain high growth rates (this is in part due to the income disparity problem), thus it must rely heavily on foreign savings i.e. foreign investment. For example, just to complete the current infrastructure development that must be done for the World Cup in 2014, Brazil's investment rate must jump from its current 19 percent to 23 percent of GDP. This means the country will "rely on external savings equivalent to 3-4% of GDP for years to come. That gap can be easily financed with today's abundant global liquidity, but a disorderly European default or an eventual US monetary tightening could change that." Brazil's saving-investment balance is further plagued with high interest rates (typically over 10 percent, most recently at 7.25 percent) which will hamper future growth if capital liquidity from the outside world shrinks or if the Brazilian government finds it difficult to continue to subsidize loans to domestic industry. Watch how Brazil's manages this investment-savings balance; it will be a key indicator if Brazil's growth is sustainable.
Critical reforms and lots of hard work and difficult decisions must be made during the next decade if Brazil is seeking a seat at the "big boys table," This continent-sized country has the world's attention; the question is whether it can keep it beyond a Latin American audience in the days to come. Back to my original assessment—Brazil will stay a regional economic superpower unless a true miracle occurs.
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