The media always seem surprised by sudden national manifestations like the emerging economies even though they were long in the making. And then comes the blind awe at the events. In this special essay, Marcos Troyjo takes a comparative look at the evolution and future of Brazil within the context of the other BRIC members.
Imagine boarding a time machine back to 1971, and landing in the midst of a conference bringing together Nobel Laureates as well as some of the world’s most respected strategists and futurologists. And they are discussing the future of China and Brazil. To guide the projections, a series of questions is asked. Which of these two countries would (a) overtake the nominal GDP of the U.S. by 2020 thereby becoming the world’s largest economy, and (b), hold 60 percent of its GDP tied up with foreign trade? And, finally, (c) become the world’s top destination for foreign direct investment (FDI)? Most would put their chips on Brazil. In the early 70s, the South American giant was in the midst of the “Brazilian Miracle,” its economy was growing at over ten percent per year, and Pelé was a household name even among those who knew nothing of football. Then, as now, there was great enthusiasm around the world for Brazil.
Order and entropy
China in the 70s drew international attention not for its production of goods and services, but for its production of problems and the brutality of its cultural revolutions and great leaps forward. What happened during these past four decades to propel China to such a prominence? Even now with Brazil in full fashion around the world and the respect one must carry for the potential of other emerging markets, the fact is that, in 2011, Brazil, India and Russia together are economically the equivalent to one China. The big difference is that Brazil faced the last two decades with a “lantern on the stern” – and sometimes the wind extinguished the flame. China, on the other hand, projected a “lantern aimed at the future”. China drew up a plan. The cat, no matter its colour, would hunt mice. It chose a model. It stuck to it. Brazil didn’t.
China decided to radiate power and prestige from a solid economic base. It devised a national project based on foreign trade and attracting FDI. It promoted – and still promotes – a generational sacrifice on behalf of savings and investment, both at around 50 percent of GDP. It applied the heavy hand of its centralised and austere government on human rights and the environment, and it goes on doing it to this day.
The Brazilian macroeconomic disorder of the 80s and part of the 90s swept the notion of “long term” away from Brazil’s economic lexicon. Brazilians suffered as a consequence. However, the suffering people underwent cannot be seen as a “sacrifice” in the name of a national project – for the simple reason that there was no national project. Over the years, China combined public-private partnerships, labour law, an underpaid workforce, amenability to foreign capital and a light tax burden to turn the country into the largest manufacturing park in the world.
During the past four decades Brazil has not managed to implement a project of power or prosperity. Today, it confuses the concept of a national project with the PAC, the Portuguese acronym for Brazil’s Growth Acceleration Programme. Essential and welcome as it is, the PAC will not construct the future. It is merely recovering lost time. Physical infrastructure, ports, airports and roads are all in dire need of modernisation. The future for Brazil lies in making its companies tech-intensive in various industries. There is nothing more strategic for Brazil than channelling the creativity of its people into a society of entrepreneurship and innovation. The country’s comparative advantages of today – bioenergy, mining, oil, pre-salt – have to be put to the service of building the competitive advantages of tomorrow, i.e., expanded R&D, patents, new products, companies and universities inextricably linked.
Contemporary Brazil is witnessing the quiet rebirth of theories and policies first formulated by the brilliant Argentine economist Raul Prebisch (1901–86). This renaissance may be called “Import Substitution Industrialisation 2.0” or “ISI 2.0”. ISI 2.0 can be easily identified in the way stateowned enterprises, banks, municipalities, states and the federal government interpret and implement Brazil’s interest in the global economy. Today, ISI 2.0 is the parameter of how government in Brazil protects national companies from foreign competition, fosters local content and goes about procurements.
In the 1940s and 1950s, Prebisch did away with two illusions that plagued the imagination of Latin Americans: First, comparative advantages in commodities would allow Latin American elites to keep their living standards at similar levels to those of the elites in major Western economies. Second, technological and material evolution would follow a uniform route. According to this fantasy, US development levels could be naturally achieved by countries featuring equivalent population, territory and natural resources – such as Brazil and Argentina – sometime in the future. Prebisch argued that only those countries performing massive technological innovation could be considered “cyclic centres” of the global economy and therefore manage to endogenously trigger their own development.
Given Latin America’s relatively low industrial and innovative capacity and the comparative decline in real prices of raw materials throughout the years, Prebisch encouraged the region to “industrialise or die”. The instrument conceived by Prebisch was the well-known policy of import substitution. Present day ISI 2.0 has two faces. It continues to imply high import tariffs and other barriers to protect national groups and foster Brazil’s elected industrial priorities – semiconductors, software, electronics, and so on – and other more traditional industries such as automobiles. As the country’s currency, the real, is clearly overvalued, trade balance deficit would be even larger if it weren’t for the tariff shields, which make for outrageous prices paid by Brazilian consumers for most foreign goods. Much as its original 1950s prototype, ISI 2.0 is clearly “nationalistic”. It aims nonetheless to reinterpret and update the concept of “economic nationalism”. Rather than merely encouraging or sheltering Brazilian entrepreneurs, ISI 2.0 calls for the “Brazilianisation” of companies wishing to harness the potential of Brazil’s domestic market. An entire set of incentives is put at the service of those who decide to create jobs in Brazil. Its most powerful tool is the robust policy of government procurement which finds full expression in the Lula-Dilma administrations. The ISI 2.0 model is essentially vulnerable over time. For its success, it relies on heavy, non-stop flows of FDI pouring into Brazil over many years. For all this to work smoothly, apart from the urgently-needed structural reforms, ISI 2.0 will need to generate shorter learning cycles and thus boost rapid and voluminous gains in productivity.
China wants to be rich and thus powerful. It has been following a clearcut strategy already in place for over 30 years. This has helped increase its prestige and power. Its performance in the field of “new” international agenda items – (human rights, environment, etc.) lags behind its economic power. China will continue to be the manufacturing plant of the industrial world for many years.
Investment in China will be driven primarily by the creation of local infrastructure focused on trade for export markets, whilst the country’s capital markets will still remain inchoate for many years. India wants to be powerful and hence enjoy global prestige. Its competitive edge resides in low labour costs (wages) in certain sectors (textiles, outsourcing, information technology). It has no coherent project for prosperity. Investments will continue to f low from companies seeking to lower their labour and other production costs by “offshoring” their plant, call-centre or web-centre operations. Investment will be strong in areas of value-added products, such as chemicals, software and other IT-related industries, but the scale will not be quite sufficient to make it boom across all socioeconomic structures. Moreover, capital markets will remain incipient when compared to international counterparts. Russia wants power, prosperity and prestige, but it is uncertain on how to get it. Sometimes it still talks and behaves like a superpower. The population of scientists is immense. The Europeanisation of Russia – one of the country’s age-old dilemmas – will create tension between conflict and cooperation with countries within its sphere of influence. But such tension will ultimately produce positive results for Moscow. Once the European economies find their balance again, investment will resume their vigorous flow from the European Union towards Russia (which in reality is the last frontier of Europe). Domestic and international investment will be focused mainly on infrastructure and capital-intensive industries.
Brazil, finally, does not have a sophisticated project in terms of power or prosperity. Its idea of global reputation is intertwined primarily with strengthening the UN and the construction of a South American community of nations, as well as a south-south cooperation, but with little margin beyond “good intentions” and “balanced” relations with the world’s top players. Recent attempts undertaken by Brazil to build strategic relations with China or France, for example, have been unilateral in most cases.
The new position of Brazil in international relations will come from successes in specific sectors – agro-energy, mining, drilling and extracting of oil offshore, planes, giant bank conglomerates and the multiplier effects for the service industry of investm ent in infrastructure. And to a large extent by the new oil-power status made possible by the pre-salt discoveries. There is indeed what we could call “the pre-salt hedge”. This idea suggests that multiplier effects of new oil discoveries for Brazilians and all those who decide to gamble on Brazil will be so huge in the next 30 years that the prospects alone will suffice to “anchor” the decision to set up long-term operations in the country.
Setting the BRIC agenda
The idea of “BRICs,” a group of emerging nations that comprise Brazil, Russia India and China, as a valid category for the analysis of present and future international relations is a “concept-in-the-making”. The success of each of these countries in the political economy of the 21st century will come mostly from answers to four questions each of these rising stars are obliged to ask themselves:
- What is your vision for your country’s future?
- How do you pursue your goals in an interdependent and yet conf lict-ridden world?
- How are you preparing for the digital economy of knowledge?
- What sacrifices are you willing to make?
For BRICs to act as a group, allowing for greater internal and external policy cohesion, join forces and thus exert greater inf luence upon international relations, they will have to make progress on:
- becoming more than just nations that share similar geographical, social and economic statistics – vast territory, large population, booming economy, great potential to play constructive or fragmentary roles in their geopolitical regions and in the global economy,
- developing articulate views and actions in pursuit of their interests and in understanding how the world should work, and
- establishing regular and formal fora that bring together business leaders, civil society and government authorities in formulating a common agenda.
Still, even before considering the individual motivations of each member of the BRIC group, or even the possible future cooperation involving the four countries, it is worth remembering what the BRIC members are not (at least until now):
- BRIC members are not an international organisation.
- BRIC members are not an economic bloc with free-trade arrangements.
- They are only now moving towards a platform for building consensus on an international agenda regarding items such as human rights, the environment, international peace and security, rules for international trade, joint action in the UN or the WTO, etc.
BRIC members must know what they want for their countries, their elites; what they want for the world and from the world. So one must ask whether BRICs have:
- A power project
- A project for prosperity
- A project for prestige
- A project for prestige
Article by Marcos Troyjo
Marcos Troyjo is a political scientist, economist and diplomat. He is the founder of Brazil’s Center for Business Diplomacy and holds a PhD from the University of São Paulo. He is a scholar at University Paris V (Sorbonne) and co-Director of the newly-founded BRICLab at Columbia University.