Brazil

In the economic development world, one of Latin America’s claims to fame are its conditional cash transfer programs (CCTs), which provide direct money transfers to low-income families who send their children to school and/or get basic health care. A few of these programs, such as Bolsa Família in Brazil and Oportunidades in Mexico, reach millions of families (some 20 percent of the two countries’ households). Others are smaller and more targeted toward the extreme poor, such as Chile Solidario in Chile, Familias en Acción in Colombia, and Bono de Desarrollo Humano in Ecuador. Most now boast at least a decade in place, providing a track record to test their reach and effectiveness. One of the CCT programs’ biggest achievements is keeping more kids in school. Studies of Colombia’s, Ecuador’s, and Brazil’s programs all show increases in school enrollment and attendance. The effects on educational achievement (as measured by standardized tests) are more elusive. In fact some reports show students as a whole falling behind, as schools struggle to incorporate the influx of students (some that had dropped out of school and/or that require more concentrated attention to bring them up to grade level). Now with a larger captive audience, the next important, if difficult, step for these governments is to improve the quality of education. Studies also show CCT programs help reduce poverty and inequality. In the last two decades the number of poor declined sharply, from almost 50 percent to roughly 30 percent of the region’s population. Cash transfers mattered, especially for the extreme poor, where inflows make up fairly large shares of their income (up to 25 percent for Mexico’s absolute poorest). One International Poverty Center for Inclusive Growth study calculates that Bolsa Família lowered Brazil’s poverty rate by 8 percent, and reduced the severity of poverty by even more (21 percent). A separate evaluation of Colombia’s Familias en Acción revealed similar results; extreme poverty among participants dropped between 12 and 17 percent. In addition to poverty, these programs reduced inequality. A study by Rafael Guerreiro Osório, Fábio Veras Soares, Marcelo Medieros, and Eduardo Zepeda, revealed that CCT programs were second only to labor income increases in reducing the Gini coefficients in both Mexico and Brazil. The effects on healthcare seem to be more mixed. A 2011 evaluation by the International Food Policy Research Institute found Bolsa Família recipients twelve to fifteen times more likely to immunize their children and pregnant women an average of 1.5 times more likely to visit a doctor than their non-participating peers. In contrast, a 2007 report by Brazil’s Ministry of Social Development saw little impact on vaccinations. The difference may in part reflect the expansion of Bolsa Família into areas with few clinics, but the conflicting results leave questions regarding the program’s effectiveness. What CCT programs don’t seem to do is keep people from working (a somewhat common critique by those who fear that the subsidies reduce the incentives for recipients to get jobs). Studies of Chile and Brazil show the reverse; the programs boosted labor force participation (by 2.6 percent). Another World Bank study shows that Bolsa Família  increased self-employment. Though a few voices argue that CCT programs provide money for conditions that are already being met (the majority of Latin American children from low-income families are already in school), most researchers find that these countries are getting a substantial bang for their buck. Budgets for even the biggest programs in Brazil and Mexico make up far less than 1 percent of GDP. These targeted transfers are not a panacea for the ills facing so many nations, but by most measures they are a strong step forward, providing immediate benefits to the poor, and hopefully (if complemented by other programs) creating a longer term path for them to become better educated, healthier, and more productive citizens.

The Organization for Economic Cooperation and Development (OECD) released a report this month on the overall well-being of its thirty four member countries (as well as Brazil and Russia). Looking specifically at the three Latin American countries in the study—Mexico, Brazil, and Chile—some of the results aren’t surprising. The three countries all come in the bottom four positions (joined by Turkey) in categories such as safety, education, and income, far outpaced by the more mature economies within the organization. But they performed comparatively well in other areas. For instance, Mexico came in ahead of Israel and Greece in terms of housing (judged by housing satisfaction, rooms per occupant, and access to private indoor flush toilets). This reflects the expansion of public and private mortgage credit over the last decade, which helped finance some seven million new homes. Chile stands out vis-à-vis its Latin American neighbors and other nations on educational attainment. While roughly a third of Mexicans and Brazilians make it through high school, some 69 percent of Chileans do—near the OECD average of 74 percent. The three countries have also made great strides in expanding health care access (through social programs such as Mexico’s Seguro Popular). Though still placing in the bottom half of overall health (measured by life expectancy and self reporting of health problems), the three Latin American countries now best more affluent countries such as Japan and Korea. The report highlights the ongoing challenges for these Latin American nations. The most obvious remains household income, as Mexico, Chile, and Brazil’s average incomes all stand at less than half the OECD average. If these countries want to move from emerging market to developed economy status they will have to grow faster. And they are already starting to face some “developed country” headwinds, such as the health problems that come with rapidly climbing rates of obesity (now comprising over a quarter of all Chileans and Mexicans). Despite these hardships, Mexico, Brazil, and Chile (as a group) beat out many of their OECD counterparts (including countries such as Spain, Italy, and Japan) in terms of “life satisfaction.” Perhaps this reflects the fact that, though challenges remain, many see and feel progress over their lifetimes, and are optimistic about the future.

Though specific countries usually capture the headlines for their bloodiness—Mexico, Guatemala, Honduras, and often Colombia—security problems are widespread throughout Latin America. For the region which holds the unfortunate distinction of being the world’s most violent, a new Latinobarómetro report looks at the recent trends, and through survey data,  tries to tease out how this affects perceptions, people, and, more broadly, democracy. Some interesting points emerge from this quite extensive study. One is that general perceptions and realities often don’t match up. In part, this is because there are many different types of crime, and governments, media, and other public opinion shapers often only focus on one set of measures. For instance, Costa Rica, Peru, and Argentina are generally thought of as being some of the more peaceful countries in the hemisphere, due to their relatively low homicide rates (all have below twelve homicides per hundred thousand people). But according to Latinobarómetro’s (self-reported) crime surveys, all three are far above the Latin American average in terms of criminal activity, with Peru ranking second, Costa Rica fourth, and Argentina sixth out of the eighteen surveyed nations. This means that while the chances of being murdered are less in these countries, the odds of being assaulted are quite high. This helps perhaps explain why Costa Ricans, for example, are more fearful of becoming a victim of a violent crime than are Mexicans, Brazilians, or Hondurans. These differences may also help to explain the disconnect that so many citizens feel with official rhetoric that places the emphasis solely on murder rates. For instance, the Calderón administration has repeatedly emphasized that Mexico’s murder rates are lower than other big Latin American countries—Venezuela, Colombia, or Brazil. Yet when looking at broader crime surveys, Mexico tops the list. Over 40 percent say they or a family member have been victims of crime in the last year (compared to the Latin American average of 33 percent). Though the horrific drug violence may indeed still be fairly concentrated, crime is not—a challenge Mexico’s government must acknowledge and face. Finally, citizens’ faith in Latin American governments’ abilities to tackle insecurity varies. A strong majority—61 percent—of Latin Americans think their governments can do it—with Uruguayans, Ecuadorians, Brazilians, and Venezuelans most optimistic. The linchpin seems to be the police. Most Latin Americans don’t trust their police—particularly Guatemalans and Mexicans. But this seems to be the way forward for taking on crime. If these nations can confront the challenges in professionalizing their police forces and gain the confidence of their citizens, then perhaps both the realities and perceptions will shift for the better.

The recent IMF economic outlook report entitled, “The Western Hemisphere: Rebuilding Strength and Flexibility,” is overall quite bullish on the region. Fueled by favorable commodity prices and plentiful international credit, it lauds (as much as the IMF does) the steady growth of the past decade. Perhaps as important for the IMF, many Latin American governments have used rising revenues in economically sound ways. The region as a whole has turned deficits to surpluses, and lowered debt to GDP levels by some 15 percent. Many countries invested in targeted social programs, helping reduce regional poverty levels from 44 percent in 2002 to 33 percent in 2008. Commodities have driven this growth, led by South American exporters such as Argentina (soybeans and grains), Peru (gold and copper), and Uruguay (beef and rice). But their booms also reflect other forces—for instance, expansionary policies in Argentina, high levels of foreign direct investment in Peru, and domestic demand in Uruguay. The report also highlights the expansion of the middle class and consumption-led growth, focusing particularly on the rapid increase in mortgages. In countries such as Brazil, Chile, Colombia, Mexico, Peru, and Uruguay this sector has grown an average of 14 percent a year since 2003. The report distinguishes between financially integrated commodity exporters (Chile, Brazil, Colombia, Peru, and Uruguay) and those not integrated into global financial markets (Argentina, Bolivia, Ecuador, Paraguay, and Venezuela). Not surprisingly, the report favors the former group, talking up their macroeconomic management, lower inflation rates, and in some cases rainy day funds. It also argues that the latter haven’t been able to take advantage of cheap international financing to their economic detriment. The real economic test for the countries in the region will be how they fare when external conditions become less favorable—the commodity boom slows and/or widespread cheap credit fades. If the IMF is right, the divides between integrated and non-integrated exporters will only deepen, revealing the wisdom and folly of today’s diverging economic policies.

Yesterday I attended the annual Brazil Summit in New York, organized by the Brazilian-American Chamber of Commerce. What struck me in the presentations (reinforcing what I heard during my last two visits to Brazil), was the quite disparate views of Brazil today and the levers for growth tomorrow. The first panel focused on information technology (IT). Here the speakers touted Brazil’s current position as the sixth largest IT market in the world, and it’s potential to rise to the third. In their view, this rosy future depends on the government. Here kudos were given for Dilma Rouseff’s Science without Borders program (which she highlighted on her recent visit to Washington DC and during later stops at MIT and Harvard), which will send some hundred thousand Brazilians to do post-graduate work abroad in the next four years. Also plugged was the government’s PRONATEC program to train some eight million mid-level professionals and technicians. On the investment side, the speakers highlighted the billions the government is investing in IT infrastructure (broadband, telecommunication networks, and the like), and billions more in payroll tax breaks and other public incentives within the “Greater Brasil” (Brasil Maior) plan to support the expansion of IT industries. In addition (and under government direction), Petrobras will provide some $200 billion in IT investment over the next decade as part of the buildup of its oil and gas business. Finally, on top of these specific programs, the BNDES—Brazil’s national development bank—will earmark a good portion of its $100 billion in annual lending for IT initiatives. For those on the panel, Brazil’s government has never been so involved, and has never been so necessary to leapfrog past the bottlenecks of today to the technology of tomorrow. This contrasted sharply with the second panel on infrastructure. Here the mood was more somber, both about the challenge Brazil faces and the positive role to be played by its government. The overall picture was that Brazil’s infrastructure is bad and comparatively getting worse. Only 6 percent of its roads are paved, compared to over 50 percent in its BRIC counterparts China and Russia (and 35 percent in Mexico). According to the World Economic Forum’s Global Competitiveness Index (which ranks country’s infrastructure on a scale of one to seven); Brazil trails not only the Asian tigers such as Hong Kong and Singapore (which score in the six’s), but also countries such as China and Chile. Despite being the world’s sixth largest economy, Brazil comes in at 104 out of 142 countries in terms of its “overall quality of infrastructure.” It is also moving in the wrong direction, falling six spots over the last three years. Yet when getting to the fixing phase, most of the suggestions involved less, not more government. Industry leaders did talk about needing a better skilled labor force (a public but also private sector challenge). But they also stressed streamlining bureaucracy, lessening the tax burden, lowering interest rates, and importantly creating long-term financing markets independent of the BNDES as vital to turning the situation around. For those in the infrastructure trenches, government doesn’t seem to be the answer. These two seemingly contradictory positions capture another aspect of Brazil’s reality—the fundamental tensions over the best future development model: state or market led. As Brazil works to become a true global powerhouse, both camps have their supporters and detractors. Perhaps the greatest challenge will be to find a balance, incorporating both strands in order to harness (rather than hinder) the many potential engines of growth.  

Two reports came out recently from the Center for Strategic and International Studies (CSIS) and the Council of the Americas (COA), both looking at Latin America and framing their substance as “national security” concerns. The first from CSIS, "Police Reform in Latin America: Implications for U.S. Policy," describes how police reform has become a mainstay of foreign police and national security, not only in war zones such as Iraq and Afghanistan, but also in the Western Hemisphere. This report provides a good overview of the history of police reform and assistance, which has been going on in one form or another since the 1950s. The history and changing scope of efforts attests to the challenges of security assistance, which would likely remain even if the U.S. Congress reforms its current legislation to allow more straightforward funding of these types of initiatives (one of the recommendations of the report). They also recommend concentrating mostly on Mexico and Central America (where we already have growing programs – the Merida Initiative and CARSI respectively), as these are the most important areas for immediate U.S. security. The second report by COA, “Bringing Youth Into Labor Markets: Public-Private Efforts amid Insecurity and Migration,” also frames its concerns and recommendations around national security. It focuses on root causes of the violence and crime, specifically the lack of viable employment for young people, that Latin American police forces must tackle. Indeed, the statistics are sobering for those trying to break into the workforce for the first time. The report  highlights some small, innovative government and private sector programs in Mexico and El Salvador that are trying to provide a means for young people to enter the formal labor force. One of the main challenges the authors portray is the gap between what is learned in schools and what is needed on the job. In this Mexico and El Salvador aren’t alone. While in Brazil a few weeks ago, I repeatedly heard a similar lament– even though the country is at record low unemployment. Talking with company executives in the United States (and reading this revealing piece in the Atlantic), shows that this is a wide-spread problem, for “emerging” and “advanced” economies alike. Given the importance of police reform and youth employment for security, the question becomes what the United States can do (and how it can do it). This varies widely. The government can play a substantial role in police reform – though without a willing and motivated counterpart, it is unlikely to get very far in the big structural and cultural changes that this really entails. In terms of job creation and youth employment, the main catalyst has to be the private sector (recognized in the public-private partnership aspect of the report). What the CSIS and COA reports reflect more broadly is the expanding definition of national security, moving beyond militaries and defense budgets. Though much more complicated and inherently messy, these approaches are also more likely to succeed in the goal of creating sustainable and lasting security in the hemisphere.

I just came back from speaking on a panel, on Brazil and Latin America more broadly, at a conference for institutional investors. We five panelists came from research, investing, and on-the-ground business backgrounds, providing a variety of perspectives and interesting conversation.  Overall three big themes emerged in our discussion: Brazil still holds the top spot in investor thinking, with the majority of our time focused on its prospects. But though most were positive on the country, they were less so on the investment opportunities. The main challenge is that so many portfolio, pension, and private equity investors – both foreign and domestic – have poured into Brazil’s markets that bargains are few. Instead, those actively investing are looking to Mexico, Colombia, and Peru –markets with good fundamentals but less competition. Some saw potential in the “smaller cap” space (U.S. $25-50 million investments), but these more “under the radar” discoveries require deep personal (and often political) ties on the ground. What all see are well-known international companies and brands (particularly in the tech space) scouting out Brazil, considering direct investments and/or locating facilities there to spread their global base and gain access to the growing local market. A second theme was Latin America’s rising consumers, a group that has grown by at least 70 million in less than a decade. Whether in Brazil, Mexico, Peru, Colombia, Chile, Argentina, or elsewhere, this phenomenon is seen as a big strength not just for future growth but also vis-à-vis other emerging economies such as China. Finally, there was more optimism about the United States than I had heard in a while. The general feeling was that the economy has turned a corner and, though perhaps slow, it is moving forward. For the long term most were quite bullish, in part due to the perceived ability of U.S. corporations to grow and innovate abroad (in places such as Brazil and its neighbors), bringing benefits both here and there.