Brazil

In the lead-up to the World Cup and through the first games, Brazilians have taken to the streets in protest. In this post for Daniel Altman on ForeignPolicy.com, I look at why these demands for change could help Brazil overcome its many domestic problems. The post begins: World Cup controversies in Brazil are supposed to be about team selection and tactics, but this year they’ve focused on much bigger issues: jobs, poverty, public services, and corruption. Past tournaments have been a boon for governments hoping to distract their people—and the world—from exactly these kinds of issues. Could this one be different? Major sporting events in Latin America have a history of both illuminating and eliding larger homegrown problems. The 1968 Olympics in Mexico City was preceded by massive protests and the ignominious slaughter of hundreds of students in the capital’s downtown, revealing the ugly authoritarian side of the Institutional Revolutionary Party’s (PRI) regime. And the 1994 World Cup hadn’t even finished when Andrés Escobar, having scored an own goal in a match against the United States during Colombia’s brief campaign, was murdered upon his return to Medellín, then the world’s cocaine capital. You can read the rest of the article here.

In a widely expected move, the ratings agency Standard and Poor’s (S&P) downgraded Brazil’s long term debt from a credit ranking of BBB to BBB- on March 24, bringing the country’s sovereign bonds a step closer to losing their “investment grade status” (defined as BBB- or above) and becoming "speculative" or “junk bonds.” The rating stems from a combination of indicators—including GDP growth, inflation, and external debt—that S&P uses to measure a country’s creditworthiness and its fiscal, regulatory, and political risks. Since the turn of the twenty-first century, Latin America’s overall credit ratings have trended upward. By Fitch’s rating system, twelve out of fourteen Latin American countries have higher ratings today than a decade ago, one stayed put, and only one fell in the credit ranks. Chile sits at the top, reaching S&P’s AA- status (AAA status is the highest possible) in late 2012, on par with Japan and just above Israel. Mexico ranks next with a BBB+ rating (bumped up after its ambitious reforms passed); Peru too rates BBB+. At the bottom is Argentina with a CCC+ rating, improved from DDD after its 2001 default. Before the recent S&P downgrade, Brazil’s sovereign credit rating ranked roughly in the middle of the region, on par with Colombia and Panama. S&P justified the downgrade based on the country’s “fiscal slippage”, its controversial accounting mechanisms, and the low likelihood that it will tighten spending before the October presidential election. Does it matter? Many have questioned the importance of these scales, as well as the ratings agencies analytical independence. For Brazil, the downward shift had already been largely priced into domestic markets, and it seems to have had little effect in other nations. Further, the two other major agencies, Moody’s and Fitch, have yet to join their skeptical colleagues at S&P. But before the government waves away the opposition critiques, they should reflect on the costs. Where it can and may matter is for Brazil’s companies, as corporate credit costs often follow sovereign rankings (known as the “sovereign ceiling”). In the twenty-four hours after Brazil was downgraded, S&P also lowered the ratings for two-dozen banks including Banco Santander Brasil and Itaú Unibanco. And studies show that highly-rated companies reduce investment after sovereign credit rating downgrades (though it affects lower-ranked companies less). Dilma Rousseff may easily brush off any criticism and win a second term. Still, the downgrade could hinder her economic recovery plans. With Brazil turning increasingly to the private sector to fund much needed investments in ports, roads, and airports, a higher cost of capital for private domestic companies would give multinational firms a leg up over their Brazilian counterparts. And unlike in the recent past, Brazil’s public and development banks (BNDES and Caixa Econômica Federal) are unlikely to step in with abundant cheap loans, as they are already pulling back. The downgrade also gives fodder to those talking about the divide happening in Latin America, characterized alternatively as between East and West, between a politicized Mercosur and the new Pacific Alliance, or generally between countries embracing world markets versus those pursuing a larger state role in the economy. S&P’s analysis reflects where they believe Brazil is leaning.

Earlier this week, Salvadorans headed to the polls to cast their ballots in a presidential runoff election, since on February 2 the candidates failed to reach the 50 percent threshold to avoid a second round. In the runoff’s lead up, Salvador Sánchez Cerén, a former guerrilla commander and the current vice president from the ruling party, looked poised for an easy win over his closest opponent Norman Quijano from the conservative Nationalist Republican Alliance (ARENA). But with the final ballot count separating the candidates by some 0.2 percent of the votes and with allegations of fraud, it seems that the protests and debates surrounding this election are far from over. The Costa Rican elections were also held on February 2 and similarly, were pushed into a run-off scheduled for April 6. With second place finisher Johnny Araya’s (from the ruling National Liberation Party) recent exit from the race, Leftist Luis Guillermo Solís’s (from the Citizens’ Action Party) victory is all but assured. While neither of these two elections are yet resolved, there are others on the horizon in Latin America. On May 4, Panamanians will elect their president for the next five years. Current President Ricardo Martinelli’s time in office is coming to an end, at least for now, given Panama’s restriction that presidents must wait two terms before trying again for office. Though Martinelli and his conservative Democratic Change (CD) party led Panama through a period of extraordinary 8 percent (on average) economic growth and declining crime, the country’s stark income inequality (which I talk about in this blog post) combined with shifting political alliances, could provide headwinds for the party’s candidate José Domingo Arias. On May 25, Colombians will head to the ballot boxes to decide whether or not to reelect President Juan Manuel Santos. As of now, Santos’s odds look fairly good—garnering 26 percent of the vote in a hypothetical “next-day election” scenario; 19 percent more than his nearest rival, Óscar Iván Zuluaga of the Democratic Center party, 18 percent more than Enrique Peñalosa of the Green Alliance party, and far above the more recent entrant to the race, Marta Lucía Ramírez from the Conservative Party. Santos  is staking much of his campaign on the peace agreement with the Revolutionary Armed Forces of Colombia (even as Colombians become increasingly pessimistic over its success), and he will also face tough questioning over his economic policies and subsequent handling of rural protests (that pushed his approval ratings down to 25 percent last August). Still, his popular support has rebounded—up to near 40 percent in March—and this momentum, without a strong challenger, will likely take him back to the Casa de Nariño. October brings presidential elections in Brazil, Bolivia, and Uruguay. In Brazil, most expect President Dilma Rousseff of the Worker’s Party (PT) to win reelection against Aecio Neves (from the PSBD party) and Eduardo Campos (from the PSB party). Still, with economic growth faltering, worries about the coming World Cup (with latest reports questioning both the sporting event’s expense and the country’s readiness), and still vivid memories of last summer’s widespread protests, a unified challenger could make the race interesting. That same day Bolivians will also be casting their ballots. Evo Morales is up for his third term, after a constitutional amendment in 2009 allowed for reelection and a 2013 constitutional court decision decided that his first term did not count toward the two term limit (since it began before the new Constitution). With twelve parties and a crowded race, no serious challenger has emerged to take on Morales. Still, questions remain whether the president’s Movement for Socialism (MAS) can gain an absolute majority—potentially frustrating any major policy changes. Uruguay’s famously spartan President Jose Mujica will bid goodbye to a presidential palace in which he never lived. The frontrunner for his position is former president and Broad Front colleague Tabaré Vázquez, who left office in 2010 with an approval rating of over 60 percent. A Vázquez victory would mean continuity for the country and a continuation of Mujica’s policies, such as the country’s marijuana regulation and renewable energy promotion.

When people talk about what holds Brazil back, education tops the list (along with infrastructure). The poor quality of Brazil’s public education system limits students’ capabilities and adaptability, creates mismatches between workers’ skills and companies’ needs, and stifles productivity and entrepreneurship. These limits affect the entire economy—hampering economic growth, competitiveness, research & development, and even oil production (as Petrobras has struggled to find skilled workers for its pre-salt finds). Brazil now ranks fifty-third (out of sixty-five countries) in reading, math, and science in the PISA exam, up from dead last in 2000 but still behind Mexico, Romania, Thailand, and Russia. But perhaps most striking in the education system are the country’s great disparities. Brazil’s several high quality public universities—including the University of São Paulo, an internationally recognized university—juxtapose a notoriously weak system of primary and secondary schools. In part it has to do with funding. A sizable chunk of the federal education budget—some 5.5 percent of GDP—goes to tertiary education. Brazil spends almost five times more per college student (with its free public university system) than per elementary school pupil. This top heavy investment disproportionately benefits the rich, whose children perform better on the university entry tests after spending their elementary, middle, and high school years in private schools. The lack of money at the lower levels has translated into too few elementary and secondary schools. With more pupils than classrooms, Brazilian students rotate through schools in shifts, with some attending class for just four hours a day. There are also not enough teachers; with twenty-three Brazilian children for every elementary school teacher, far above the OECD average of fifteen. Brasilia began to address this lopsidedness in the years following democratization. President Fernando Henrique Cardoso created a National Education Plan, which worked to systematize the nation’s sprawling school network. He redirected educational resources toward the lower grades, and improved access to and attendance at primary schools through programs such as Bolsa Escola, which pay poorer families to send and keep their kids to school. At the university level, Cardoso’s administration introduced the first racial quota system. President Lula further increased educational funding—now through Bolsa Familia—more than doubling government spending per student, and opened over 200 technical schools. President Rousseff has followed suit, allocating 75 percent of pre-salt oil reserve revenues to fund Brazil’s education system. Today Brazilians stay in school longer than ever, and nearly double the number of young students go on to graduate from college compared to previous generations. Comparative results are improving as well, with Brazil’s international PISA scores slowly rising from the bottom. Still, big challenges remain. Teachers have protested reforms that would mandate a forty-hour work week (right now only 6 percent of teachers work full-time), and create merit-based bonuses. Teacher absenteeism also remains pervasive, disrupting learning in 32 percent of schools in 2008. For now, though Brazil’s education system is moving forward, many feel it is not moving quickly enough.

In 2007, Petrobras engineers struck black gold, discovering vast oil reserves in the deep-water off the Brazilian coast and permanently altering not only Brazil’s energy landscape but the country’s economic and political fortunes. Immediate surveys predicted that some 80 billion barrels were trapped in these pre-salt reserves (named after the rock layer they are located in), a number so high that then-President Lula declared the find as proof that "God is Brazilian.” Forecasters heralded Brazil’s coming energy dominance, predicting output to more than double to 5 million barrels of oil a day by 2013, transforming the country into the world’s fourth largest oil producer (behind only the United States, Saudi Arabia, and Russia). Six years later, here is a look at where the fields stand today. Output has increased just 20 percent to 2.6 million barrels a day (some 350,000 barrels from the pre-salt fields), making Brazil the world’s eleventh largest oil producer. The vast difference between initial expectations and today’s reality comes in part from timing, as pre-salt production had a slow start, only really taking off in 2011. But other barriers have also limited exploration and production. One of the structural challenges has been Brazil’s infrastructure. With 30 percent of roads considered to be “bad or very bad,” transport costs are an estimated 66 percent higher than they would be with better quality roads. Ports too are overwhelmed, with trucks routinely sitting in line at some of São Paulo’s ports for an astonishing twenty-four hours. Four new ports are scheduled to open in Rio de Janeiro by 2015 to help alleviate the backlog. Still, these bottlenecks and congestion have constrained output and raised costs so far. Disappointing, too, have been some of the fields themselves. The dramatic saga of Eike Batista and his oil exploration company OGX Petróleo e Gás is a prime example. In 2007, OGX leased large offshore oil fields, and boasted of 4.8 billion barrels in potential reserves and an imminent 1 million barrels a day in production. But as the company’s exploration continued, field after field came up dry, with the most productive well starting at 15,000 barrels a day (disappointing by most oil company standards)—precipitating the decline of both OGX’s market capitalization and Batista’s personal wealth, which fell some $34 billion. Another drag had been finding enough of the right people. Petrobras has rapidly expanded its staff over the past decade (from fewer than 40,000 workers in 2000 to 80,000 today), but the company estimates that it will need some 200,000 on staff by 2015 in order to meet its targets. And with Brazil’s unemployment rates at record lows, skilled workers able and willing to enter the company’s training programs are scarce. Also slowing the process has been the legislative process, which has taken some time to define the rules of the game. Over the last six years Brazil’s Congress has struggled with questions of how best to explore the fields (Petrobras was named the sole operator), distribute the royalties (oil producing and non-producing states are waiting to see if the Supreme Court upholds legislation mandating that they receive roughly the same share), and include foreign companies (Petrobras maintains at least 30 percent control and ownership over all future finds). Brazil also enacted a quite ambitious local content law, requiring between 37 to 85 percent of the oil supply chain to be made in Brazil during the exploration phase (and 55 to 80 percent during the development phase). Taken together, these structural and policy issues have tempered interest from many of the major oil companies skilled in deep water extraction. The most recent instance came in late September, when just eleven companies signed up to bid for the Libra field auction, the crown-jewel of the pre-salt fields (the government had expected forty). This all suggests that though still offering enormous potential, unlocking Brazil’s energy benefits is turning out to be a much more complicated and longer term endeavor.

Brazil’s President Dilma Rousseff is gearing up for her reelection bid this week, attending political rallies and drumming up support by appearing with former President Lula. As she hits the campaign trail, over the next year she will be campaigning on—or alternatively explaining—her last three years in office. So what has Rousseff accomplished during her time at Brazil’s helm? The results are, in my view, mixed. Perhaps her most defining successes have been in taking on Brazil’s long-rooted culture of corruption. In her first two years, she fired seven cabinet level ministers for alleged corruption or ethics breaches—a first for modern Brazil. She pressed Brazil’s Congress to pass the Clean Company Act (a far-reaching anti-corruption bill that goes beyond even U.S. anti-corruption legislation), and personally vetoed loopholes that would have limited fines and eased punishments for government-related contracts. Rousseff also backed Brazil’s Freedom of Information Act, judged by scholars to be one of the best in the world, as it guarantees access to information at all levels of government. Finally, she has pushed to end secret voting in Brazil’s Congress; legislation passed in the House earlier this month, and awaits consideration in the Senate. Rousseff also increased social spending on programs such as Bolsa Familia. Independent studies show this conditional cash transfer program, which now reaches some 47 million Brazilians (roughly a quarter of the population), is one of the most efficient and effective public ways to positively change the lives of low-income Brazilians. And with her support, Brazil’s Congress recently passed a pre-salt oil royalties’ law that directs 100 percent of the revenues to social development, earmarking 75 percent for education and the other 25 percent to healthcare. And finally, she made beneficial changes to Brazil’s pension systems, reining in the long term costs of these expensive and regressive social programs by placing a ceiling on payouts for public servants and capping government contributions for new hires. The Ministry of Planning, Budget, and Management estimates that this will save Brazil some $40 billion in the years to come, and will help stop the ballooning costs, which in 2011 reached some 13 percent of GDP. Countering these concrete advances is the current economic situation. Growth has been disappointing, up less than 1 percent last year, despite record low interest rates and unemployment levels. The government has also repeatedly had to revise down its GDP growth estimates throughout 2013 and more recently for 2014 due to the continued sluggish performance. And on the broader policy front, Rousseff hasn’t tackled the real barriers to growth—including the country’s tax or regulatory systems. As a result, Brazil remains a difficult and expensive place to do business. According to the World Bank, it is the worst place in the world to file your taxes (requiring a staggering 2,600 hours to do it correctly). More broadly, the World Bank Doing Business report ranks it at a low 130 out of 185 countries, well behind other emerging market peers such as Mexico, China, and even Russia. A big part of Brazil’s problem is weak infrastructure, which this government has struggled to improve. Even with solid public private partnership laws, the private sector’s appetite has been tepid—largely due to the unattractive terms offered by the government. Analysts predict that only a third of planned projects will reach auctions due to this low interest. And even the auction for the Libra oil field—one of the alleged crown jewels of Brazil’s pre-salt finds—attracted just eleven participants, far less than the forty expected by government officials. The depth of the problems may well become apparent during the World Cup next June—during the height of the campaign season—as six of the soccer stadium are still not finished, and only two out of the thirteen World Cup airports are ready. In several cities across the country, temporary terminals are being erected, costing billions while adding nothing to Brazil’s long-term infrastructure development. It is not just investors, but also ordinary Brazilians who are frustrated with their country’s lack of progress. Millions of citizens poured into the streets last summer to demand better schools, healthcare, buses, transportation, and urban infrastructure. Though paying high tax rates, even by OECD standards, many Brazilians feel as though they have little to show for it. Today Rousseff leads in the polls, ahead of potential opponents Marina Silva (of the not-yet registered REDE party), Aecio Neves (PSDB), and Eduardo Campos (PSB) in a hypothetical first-round election. But if she wants to hold her lead through next October, she will not only have to tout her successes but also address her government’s shortcomings. And if reelected, she will then need a more ambitious plan to take on the barriers that hold Brazil back if she truly wants to lead the nation forward.  

One of the common arguments in the wake of the Snowden revelations about NSA surveillance is that other countries are going to double down on developing their own technology industries to reduce their dependence on U.S. companies. The Chinese press has made this argument numerous times--highlighting how IBM, Cisco, Intel and others have penetrated Chinese society--and this was one of the themes in Brazilian President Dilma Rousseff’s address to the United Nations General Assembly: "Brazil will redouble its efforts to adopt legislation, technologies and mechanisms to protect us from the illegal interception of communications and data." This week the National Computer Network Emergency Response Technical Team Coordination Center of China and the Internet Society of China sponsored the Chinese Internet Security Conference in Beijing. At the conference, NetentSec’s CEO Yuan Shengang (Tony Yuan) compared the U.S. and Chinese cybersecurity industries. Yuan, who spent eight years in the United States, shows the difficulties of converting the attention to NSA surveillance into economics, painting a frank picture of the barriers to growth and innovation for Chinese companies. He also takes a much less techno-nationalist tone on the growth of a Chinese cybersecurity industry then the NSA spying promotes domestic industry argument would suggest. Yuan highlights at least three problems China will face: Awareness. As Yuan noted in a quip to the Washington Post, before the NSA revelations there was very little recognition of Internet security problems in China. Now, according to Yuan, domestic companies realize the need to invest in security and the government is focused on the problem. “For those in the industry, we really need to thank Snowden.” Still, the government lacks laws on cybersecurity and overemphasizes the supply of products through evaluation, licensing, and testing to the detriment of creating domestic demand. Investment. In both private and public sector funding, the United States dwarfs China. According to Yuan, the U.S. government spent $6.5 billion on security, China $400 million; the U.S. private sector spent $4.3 billion on a broad array of products, Chinese companies only $80 million. Yuan also notes a vast difference in the scale of cybersecurity companies. China’s Venustech, which claims 80 percent of Chinese banking institutions and over 60 percent of large state-owned enterprises as its customers, had revenues of close to $120 million in 2012; by comparison, Symantec’s revenue was approximately $6 billion. The pressure to maintain high sales means Chinese companies have no time to develop products and cultivate customers. Entrepreneurship. Yuan sees entrepreneurs having difficulty getting into and out of the sector. The barriers to entry are high with numerous government regulations and certificates. Preferential policies help large companies and squeeze start-ups. Venture capital (VC) is scarce; Yuan says he knows of only $30 million of VC investment in Chinese companies (including his own) compared to $1.4 billion in the U.S. Exits for small companies are hard. Yuan stresses that here are no equivalents to IBM, Cisco, or Intel buying up small companies as a major difference in the Chinese and American industries. In his speech, Yuan suggests that he will be attacked for airing these weaknesses. But the more politically sensitive part of the speech is his call for "open competition." Yuan argues that there are core areas of security, but China should still adhere to the principles of openness and fairness. No country can ensure the safety of the entire supply chain of a product, and insisting on labels that say a product is developed locally will not make China safer. So Yuan does see the NSA revelations as kickstarting the Chinese industry. But in the end, the main impetus for this will not be government policy, but a mechanism that will be familiar and welcome to his counterparts in Silicon Valley: competition.