Behind the BRICs: Brazil

Lucy Mair finds out about life in South America's biggest economy, and what the future holds for Brazil

Brazil is perhaps best-known for the Amazon rainforest, its export of world-class footballers, or the Copacabana beach during Rio de Janeiro's famous Carnival. But over the past decade, Brazil has become known as something else: a BRIC.

The acronym was coined by Goldman Sachs' "rock star" economist Jim O'Neill in 2001 to highlight the four emerging economies - Brazil, along with Russia, India and China - he thought could become the world's biggest by 2050. And, with growing political stability, the fifth-largest population in the world, and wealth in natural resources, Brazil had great potential.

Still, Jim, himself, was probably the biggest believer in Brazil. That's until the country surpassed his own optimistic predictions to post GDP of $2.1 trillion (£1.3 trillion) in 2010, before overtaking the UK to become the world's sixth-largest economy at the end of 2011 with GDP of $2.3 trillion.

But the Brazilian economy has recently slipped back into seventh place. What's more, in late December, Brazil's central bank was forced to cut its growth forecast for 2012 from 1.6 per cent to just 1 per cent, after beginning the year with hopes of 3.5 per cent growth.

Subtle rebound

Is Brazil's economy in trouble? Far from it, says Anna Stupnytska, an executive director and macroeconomist at Goldman Sachs. "Across the BRICs group, we expect an average acceleration of around 6.9 per cent in 2013. Out of the four countries, the fastest growth acceleration that we expect will be in Brazil, as well as India," she says.

Anna points out that it's important to look at Brazil's economic performance in a global context: "Last year was a very tough year for most countries - growth has slowed down around the world and there's a cyclical downturn - so it's not surprising that we haven't seen anything exciting coming out of Brazil."

But the International Monetary Fund (IMF) is optimistic and predicts that economic growth in Brazil will rebound to 4 per cent in 2013. This is largely thanks to the devaluation of the Brazilian real in mid-2012, which had been long overvalued, to make the country's exports more competitive. Anna says: "We are relatively positive, but also emphasise that it's not going to be a big rebound. It's going to be a gradual growth rebound in line with the global cycle turning."

Growing pains

Not everyone in Brazil is optimistic about the state of the economy, though. A short drive up the coast from Rio de Janeiro is Búzios, known as South America's St. Tropez. It's a playground for Rio's rich and famous, but some of those working there aren't convinced by the BRIC dream.

Daniel has just bought a beachfront bar with his brother, and they're putting the finishing touches to it in time for the high season. "Look around you," he says, "everything you see - the furniture, barware, fridges, computers - it was all made in China, not in Brazil. We're not producing anything here, I think that's our biggest problem."

Anna admits that "the industrial sector hasn't been a great performer," which is down to the underlying problems of expensive labour, high taxation and inadequate infrastructure. Together, these issues have created a poor business environment in Brazil and kept private investment in the country very low.

Mauricio is a 23-year-old economics student at the Federal University of Bahia, in the northeast of Brazil. He thinks building a better environment for business is one of Brazil's greatest challenges: "There are a lot of processes and taxes to do simple things. It's too expensive to open a company here and it's very hard, too, because there's a lot of bureaucracy and it takes a long time to gather the necessary documents." Brazil also needs to improve its infrastructure network, as the country's roads, rails, seaports and airports are no longer adequate to service its growing economy.

Finally, although Brazil is rich in human capital - with the fifth-largest population in the world, half of which in the most densely-populated cities of Rio and São Paulo, is under 18 - in urban areas the government isn't doing enough to harness the potential of tomorrow's labour force. Tiffany Garside, executive director of Action for Brazil's Children (ABC) Trust, explains: "Almost 15 per cent of 15 to 17-year-olds are not attending school, and over 50 per cent of these have a far lower level of literacy than their school year suggests. This has led to a supply-chain gap of the skilled labour needed for the growing economy."

But there are signs that some of these issues are being addressed. Anna says: "We've already seen some slight policy changes in Brazil to encourage investment, with reforms looking to lower energy costs, change the tax environment and improve infrastructure. What we want to see is those reforms gaining momentum and encouraging investment."

Big changes

Despite the challenges, economic growth has delivered many positive changes to Brazilian society. In his own lifetime, Mauricio says the biggest transformation he's witnessed has been "the growth of purchasing power" and how, in his home of Salvador City, "the 'C class' is the new middle class".

The emergence of the middle class, technically defined as those with incomes between $6,500 and $30,000 per year, has been the most significant trend across the BRICs. "This means different consumption patterns because products become available at different income thresholds. When people start crossing this middle income threshold, they start demanding consumer durables such as washing machines, TVs, cars and mobile phones," explains Anna.

In Brazil, this change is down not only to economic growth, but also the policies of President Lula da Silva, elected in 2003 - whom Jim O'Neill describes as possibly "the greatest G20 policymaker of the first decade of the 21st century". Lula and his Workers' Party introduced Bolsa Familia, a family allowance scheme, raised the minimum wage and began to tackle both urban and rural poverty. Not only that, Mauricio says the president, and his successor Dilma Rousseff, have made things better for young people in Brazil. "President Lula increased the opportunities for young people to get into university and introduced public programmes to make it easier for them to get their first job." Youth unemployment in Brazil currently stands at 18 per cent, lower than the UK and much of Europe.

Uneven distribution

Predictably, though, the rewards of economic growth are not spread evenly across Brazil - a hugely diverse country. "Brazil has one of the fastest-growing economies in the world, but it is still the tenth most unequal country in terms of wealth distribution," says Tiffany. "In Rio alone, there are 1,322 slums housing just under two million people," she adds.

Standing above Rocinha, the largest of Rio's slums, most noticeable is a sea of HD TV satellites placed next to rainwater harvesting tanks atop makeshift corrugated roofs. It becomes clear that even with the purchasing power to buy electricals and invest in technology, those buying consumer goods are not necessarily "middle class" in the sense understood in developed economies. Although the rapid uptake of technology in the BRICs is aiding development, Anna says "these countries have not sorted out all of their issues, and there are so many things they need to fix relating to living standards and human capital."

Mauricio also points out that economic growth is concentrated in the south-east of Brazil, around the mega cities of Rio and São Paulo. In Bahia state, where he lives, poverty is more than twice the national average, at 55 per cent. The Brazilian government's wealth distribution schemes have begun to tackle rural poverty, but the pacification efforts to target the symptoms of urban poverty - drug addiction, gang violence and environmental degradation - are proving less effective.

Tiffany says: "The biggest problem, voiced by ABC Trust's project partners outside of the centre of Rio, is that the gangs that have been driven out of the pacified favelas have just moved elsewhere and drugs and violence in other urban areas has consequently increased."

Looking ahead

Brazil's national passion is football, and the country is looking forward to hosting the World Cup next year. Mauricio is uncertain whether it will benefit the Brazilian communities that need it most: "The government has promised improvements in some regions, but I don't think they'll arrive in essential areas like health and education." But Tiffany says it's the job of ABC Trust and other organisations to make sure there's change for the better. "As the international spotlight is on the 12 host cities of the World Cup, it's crucial to use this opportunity to raise awareness of the reality of life in these cities for marginalised children and young people."

Anna is keen to point out that for all of the BRICs, "there's a big distinction between their potential, and their ability to realise their potential". And it's something Mauricio is aware of, too. The Brazilian economy is "like a giant but with limitations" he says. "We have a big potential to be one of the world's biggest economies, but we have to work hard to do it."

If Brazil does work hard and makes the necessary reforms to improve its taxation system and infrastructure, attract private investment and expand its role in international trade, it has the capacity to grow fivefold in the next 35 years and to have a GDP of $10 trillion by 2050. Mauricio says Brazilians are "super optimistic" that they will do so.

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