Brazil

Strips of deforested land in the Brazilian Amazon (Rickey Rogers / Courtesy Reuters). I attended a small conference a year and a half ago in Rio de Janeiro during which one of the panels focused on climate change. With one of the cleanest energy matrices around (nearly 50 percent of its energy comes from clean and renewable sources) Brazil has certainly earned its green bona fides and leadership position in world climate change talks. Alluding to Brazil’s historical leadership, they talked mostly of Brazil’s future, and its pledge - one of the first emerging economies to do so - to voluntarily reduce its greenhouse gas emissions by 38% of business-as-usual amounts by 2020. In practical terms, this means attacking deforestation, which is responsible for some 70 percent of Brazil’s emissions today. The country’s 2008 National Plan on Climate Change pledges to cut deforestation by half by 2020. During the conference the intense optimism of the Brazilians on their ability to reverse and reduce deforestation - and with it climate change - struck me. Granted, in 2009 the figures were impressive: a 45 percent drop in forests lost, the lowest level in over two decades.  Yet the declines coincided with falling commodity prices, easing the economic pressures to expand Brazil’s farms and ranches into the Amazon. One had to ask if commodity prices - particularly those for soya and beef – rise again, would Brazil be able to maintain its ambitious preservation plans? The Brazilian experts responded that Brazil’s government could in fact enforce the laws, whatever the countervailing financial incentives. In their certainty about the efficacy of the state, it seems they were right. Government monitoring and enforcement has improved - so much so that Brazil’s agricultural interests have launched a full court press to change the laws. Under the current law, known as the Forest Code, farmers in the Amazon must keep  80% of their land forested. The new legislation will exempt small-scale landowners from having to replant deforested land and grant amnesty to farmers who illegally deforested land before July 2008. Brazil’s Chamber of Deputies approved the bill last week, and the Senate should pass it soon.  President Dilma Rousseff has come out against the amnesty provisions (threatening a veto), but hasn’t condemned the overall idea of opening up more forest for tilling and grazing. This showdown between Brazil’s agricultural lobby and the environmentalists is revealing in many ways, but perhaps most about the effectiveness of the government itself. Brazil’s ranchers and farmers see the need to  change rather than just skirt the law (though unlawfulness in the Amazon does continue, heartbreakingly witnessed in the recent murders of forest conservation activist José Cláudio Ribeiro da Silva, his wife, and a witness to the murders). As the politics unfold, hanging in the balance is the world’s largest forest - the Amazon - and perhaps the future of climate change.

Thousands of commuters pack the Se metro subway station in Sao Paulo (Paulo Whitaker / Courtesy Reuters). Two recent studies look at the rise of Latin America’s middle class. The first, by ECLAC (Economic Commission for Latin America and the Caribbean), shows that nearly across the board, the share of Latin America’s middle has expanded (the exceptions being Argentina, where it shrank and Colombia, where it held steady).  The second study from Brookings places Latin America in a global comparison and looks toward the future. Here, they define the middle class on global terms, as those that earn enough to be above the poverty line in the two advanced European countries with the lowest poverty lines (Portugal and Italy) and earn less than double the median income of Luxemburg (the richest advanced country). Again the Latin American metrics are impressive. Using 2005 numbers, it finds the middle class now comprises over half of the population in four countries: Mexico (61 percent), Uruguay (56), Argentina (52), and Costa Rica (52). Data since then show that Brazil too has crossed this threshold. Impressive too are the results of their simulations for the future – even in their more conservative estimates, most Latin American countries will become solidly middle class over the next two decades (the current leaders overwhelmingly so). Three interesting points come out of these studies. First, it reaffirms Latin America’s increasingly positive economic story. In addition to exports, Latin American countries can increasingly rely on domestic consumption to fuel economic growth and advance well-being. Second, on these metrics Latin American nations far outpace China and India. While the absolute numbers of the middle class in these Asian giants are substantial, as a percentage of the overall population they remain miniscule – a paltry 3.8 percent in China and 2.5 percent in India. And they aren’t likely to catch up any time soon. Even in the best case scenarios this gap won’t close for two decades. This vast difference – and the structural ramifications for these economies - grants Latin America a potential competitive edge in today’s globalized world. Finally, if the old truism holds, the rising middle class should be good for democracy. Preliminary evidence suggests that this is indeed the case. The expansion of the middle class and of democracy have coincided in most places in the region. But more telling than this correlation, policies favored by the middle – health care, security, education, and general economic openness - are increasingly on the political agenda,  suggesting that the votes of this group matter. These dual trends hold out the hope that an expanding middle can provide both more resources to the state (through increased tax intakes) and demand greater accountability and transparency of their respective governments, deepening democracy in the process.

Back in 2000, the European Central Bank’s first president, Wim Duisenberg, explained how he knew the Bank’s operational framework for implementing monetary policy was working well.  It was, he said, successfully “steering short-term market interest rates” where the Bank wanted them to go.  Prior to the financial crisis, that was indeed the case: the ECB’s policy rate was tightly connected to important short-term interest rates, such as the 3-month government borrowing rate.  In a growing swath of the eurozone, however, this is no longer the case.  As the figures above show, the correlation between the ECB’s policy rate and actual government borrowing rates in Spain, Greece, Italy, Ireland, and Portugal has plummeted since the ECB began its debt-buying program.  The market’s view of default risk on eurozone government debt has increasingly come to dominate these rates, which themselves strongly influence borrowing rates in the private sector.  By Duisenberg’s criterion, monetary policy in the eurozone is becoming less and less effective.  The only thing that will reverse this trend is a resolution of Europe’s growing bank and government debt crisis.  Yet by continually insisting that debt restructuring is out of the question, the ECB is only delaying such a resolution - and almost surely making it more costly. Geo-Graphics: Sovereign Credibility and Bank Runs Geo-Graphics: Luck of the Irish Hinges on Banks Geo-Graphics: Greek Debt Crisis – Apocalypse Later Geo-Graphics: Beware of Greeks Bearing Debt

Plans for a $340 million overhaul of Rio de Janeiro's iconic Maracana stadium are among those behind schedule for the World Cup (Sergio Moraes / Courtesy Reuters). The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies). These investments were divided between natural resources, domestic market players, and outsourcing venues. Within the region the biggest winners were Brazil (nearly doubling to $48.5 billion), followed by Mexico ($17.7 billion) and Chile ($15.1 billion). And, according to ECLAC, the trend is set to continue – it expects FDI to the region to rise a further fifteen to twenty-five percent in 2011. A few interesting trends jump out of the data. One is the geographic pull of the Southern Cone. While investment in Mexico and Central America increased, the real upswing occurred in South America—almost four times as much. Brazil and Chile gained the most, but Peru, Bolivia and Argentina all saw large inflows. Only in the Caribbean did FDI actually fall. You also see quite stark differences in the type of investment. In South America nearly a majority of FDI poured into natural resources—oil, gas, copper, iron, and soya. Further north, a greater share of the money went into manufacturing. There the biggest winners were Mexico, Panama, Costa Rica, and the Dominican Republic – all countries with free trade agreements with the United States (NAFTA and CAFTA). These trends, if they continue, suggest long-term structural economic differences may develop between the north and the south of the hemisphere. The report also provides some context for the much-touted (and in some quarters much feared) rise in Chinese investment. It has indeed increased: last year China invested twice as much in Latin America as it did over the previous two decades combined. Directed almost solely at natural resources, it is also geographically concentrated, with most going to just three countries – Brazil, Argentina and Peru. But the data reveals that China is still just the third largest investor -- behind the U.S. and the Netherlands (the latter’s investment bumped up significantly last year due to Heineken’s acquisition of Mexico’s FEMSA brewery). Interestingly, China trails the combined Latin American investment in the region. Taken together, multilatina outlays hit a record $43 billion - almost triple China’s $15 billion contribution. These investments were more apt to go into financial services, retail, and utilities – value-added activities with more positive trickle down effects for the broader economy. This suggests Latin American nations should be more enthusiastic about trade missions from their neighbors than from China. The report also hints at the hurdles the region continues to face. The proportion of investment in high tech fell far short of its global competitors—only eight percent compared to fifty-two percent among the Asian Tigers—and limited mostly to Brazil and Mexico. The region has a lot to do to upgrade educational systems and its workforce in general to change this balance. And, with the exception of perhaps some smaller island economies, FDI isn’t going to be the ticket to the big time. It can’t make up for domestic savings and investment. In the end, growth will have to come from home. Nevertheless, these flows can provide a leg up if these nations can translate this investment into productive growth.

Brazil's President Luiz Inacio Lula da Silva holds up his oil-covered hands at the Cidade Angra dos Reis offshore platform (Ho New/Courtesy Reuters). Each day it seems Brazil finds more and more oil in the Santos Basin. Its estimated reserves almost doubled this year, totaling over 30 billion barrels (some expect them to rise as high as 50 billion barrels). This launches Brazil’s reserves to 9th in the world, just behind Russia’s. In the last months of the Lula administration, the government passed legislation that would make Petrobras, the state-controlled oil giant,  the operator of these new finds. It grants Petrobras at least a 30% stake in all future joint ventures, with contracts to be awarded to companies offering the largest share of output to the government. These changes, and the increasing role of the state, have led many to question whether the newfound oil may prove a curse rather than a blessing. Brazil has a better chance than most to achieve the vaunted Norwegian model of oil exploitation, and avoid the pitfalls of the Middle East (or closer to home in Venezuela).  In large part this is due to timing. Countries such as Venezuela, Saudi Arabia, or Nigeria found oil at the start of their process of state formation. Oil let them avoid hard choices – in particular the need for a broad based economy to tax (as well as subsequent demands for representation). Brazil already has a vibrant and diversified economy, which won’t easily fade, even with the oil influx. Second, Brazil has had significant experience in implementing national energy policies. During the 1970s, Brazil faced a situation somewhat similar to that the United States faces today – overreliance on foreign oil during years of volatile pricing. In an effort to limit its dependence, Brazil’s military government boosted hydroelectric power, and created Pro-Alcool, the National Alcohol Program. It created a now world class ethanol industry by offering low-cost loans and credit guarantees, mandating percentages in gasoline, setting government purchase prices, and guaranteeing monopolistic distribution by the state-owned energy company, Petrobras.  Forty years later, Brazil is second only to the United States in terms of ethanol production, which powers 20% of its transportation matrix. Now largely self-sufficient, its overall energy portfolio is one of the cleanest in the world. While the pre-salt finds will test this last achievement, Brazil’s history of energy management shows that it can conduct a successful long-term energy policy. Third, the pre-salt oil is hard to get at. Buried almost four miles below the ocean surface and a mile-thick layer of salt (the reason for the name), it is relatively expensive to extract. Unlike Mexico’s Cantarell fields, which were discovered by a fisherman as the oil seeping to the surface tangled his nets, extraction will require significant technology, expertise, and management. The time and effort needed to extract may work in Brazil’s favor, boosting local human capital and technology companies rather than the reverse. It may also mean that revenues enter the domestic economy more slowly, limiting the inflationary effects on domestic prices and other areas of the economy (avoiding the so-called Dutch disease.). Brazil already faces inflationary pressure—from both industrial expansion and natural resources like timber, iron ore, and beef—but prudent use of oil revenue could help not hinder their already impressive long-term growth prospects. Finally, and perhaps counterintuitively, Brazil’s vibrant (if messy) democracy may rescue it from a less attractive fate. Hardly immune from patronage, corruption, and the like, Brazil’s democratic politics provide a platform for a multitude of interests and a system of checks and balances between branches and levels of government. This true political back-and-forth and compromise has never fully operated in the Middle East (much to the region’s detriment), and arguably was never firmly established next door in Venezuela. This isn’t to suggest that everyone gets heard in Brazil or that special interests don’t have a louder say than others. But it does give a broader array of political and economic players a voice, something that doesn’t occur under non-democratic regimes. Taken together this suggests that the pre-salt oil can be what the Brazilians dream about— a means to tackle the big issues of poverty and structural inequality by boosting the social safety net, improving education, investing in infrastructure, and continuing to build foreign reserves to protect against inflation. The technological investment could also spill over into the broader economy, attracting engineers, scientists, and oilfield specialists. There are some positive examples from emerging economies— most notably Chile. Under its democratic leadership, it has managed its copper reserves (making up sixteen percent of GDP and nearly half of all exports—more than enough to curse instead of bless the nation) quite admirably. Let’s hope that Brazil follows a similar path.

President Obama’s trip to Brazil provides an opportunity for the two countries to reestablish their relationship, setting the stage for future agreements on trade, infrastructure, and foreign policy, says expert Matias Spektor.

I published an article with my colleague Dora Beszterczey in the Winter 2011 issue of the Americas Quarterly on the impact of opportunities and jobs lost to insecurity and the disproportionate costs of violence borne by small businesses and entrepreneurs.

Now that Cancun is done, it’s time to start thinking hard again about the nitty-gritty of low-carbon development. Harvard’s Energy Technology Innovation Program (ETIP) has a big new report (along with a shorter policy brief) on government investment in energy RD&D in what they call “the BRIMCS”: Brazil, Russia, India, Mexico, China, and South Africa. The report’s headline is that government investment is greater in the BRIMCS than in the OECD. My preliminary read of the report is that the most interesting stuff is elsewhere. Comparing government investment in energy RD&D is difficult to do, particularly in a meaningful way, and the new study looks to me like the best effort yet (by far). But there are still some difficult issues that remain unresolved. The last “D” in RD&D is defined very differently in different countries, and since it tends to be the most expensive part of the mix, that can strongly distort the comparisons. (The ETIP study, for example, seems to include Brazilian energy efficiency programs in its total; I wouldn’t.) Even trickier, RD&D totals for the BRIMCS are dominated by China, whose economy is itself dominated by the government and by state-owned enterprises. That makes government investment in RD&D there inevitably a larger fraction than it is in, say, the United States. What I find particularly valuable about the ETIP study, though, is its careful description and analysis of how energy RD&D is handled within the various governments. What departments are responsible? How do they interact? What are their key planning documents? This is all invaluable stuff (my colleagues and I certainly could have benefited from it while doing fieldwork for our recent energy innovation study), and it’s all worth digging in to. One last thought: People should be disturbed that this study didn’t exist before. Basic knowledge of how governments approach energy RD&D is essential to effective policymaking on energy innovation. Kudos to the Doris Duke Charitable Foundation (DDCF), which funded this study (and also mine), for supporting such an important effort to lay the foundation for good policy analysis. But DDCF is largely getting out of this part of the climate business, and this sort of analysis needs to be scaled up considerably. I’m a bit wary of the recent PCAST recommendation that the Department of Energy start funding a lot of social science work on energy innovation – the risk of politicizing the resulting work is substantial – but I’m not sure where else the necessary money will come from.

I was interviewed by Globo TV’s "Sem Fronteiras" about strategies to fight crime and drug violence across some of Latin America’s largest cities.

I co-authored a CFR report on low-carbon technology innovation and diffusion in Brazil, China and India with my colleagues Michael Levi, Elizabeth Economy and Adam Segal.