Brazil’s economy: towering or tanking? A street-level guide.

How do you forecast a major change in the economic weather? Or rather, whose forecasts do you believe in: those of Economists,  The Economist or a humbler set of “non-experts” out there on the streets?

When the president’s chief of staff and key economic adviser Antonio Palocci  falls on his sword just six months into the job, you have to ask: “who’s right about Brazil’s economy? Is it tanking, or towering ever higher?”

We know that when experts aren’t getting it wrong, they’re changing their minds. The Economist  — which tardily blessed Brazil’s current boom with its November 14th 2009 cover Brazil Takes Off , has just called time on the latest economic miracle.

In a June 4th editorial it attacks Brazil’s economic officialdom for “smugness” and fears they won’t act to squeeze a dangerously overheating economy. Red light warning: “Brazil’s economy is heading for trouble.”

But many local economists are saying just the opposite. They insist that Brazil’s new oil wealth puts a durable floor under its soaring currency. They say the demographic miracle of transforming 20 million workers into middle class consumers is sustainable, pointing out there are another 40 million still impoverished but would-be consumers waiting in the wings.

They point to planeloads of private equity scouts pouring into the country with hot money. And they insist that Brazil’s years of exposure to treble-digit inflation mean the current 6.5 % rate is kid’s stuff for the seasoned buffs at the Central Bank.

Real estate mavens say the property market – which Exame magazine reports rose 25% in the last year and is now the world’s hottest, is manageable. And there’s enough cash around – the state development bank BNDES now has a larger loan portfolio than the World Bank’s IFC – while commercial banks are some of the world’s best capitalised.

Getting it right really matters. Multinationals and financial institutions such as Banco Santander now look to Brazil to deliver a stonking 25% of their global profits. The Obama administration sees Brazil as a major engine of the global growth needed to drag America back to health and wealth. BRIC-watchers favour Brazil’s more laissez-faire economic model over Russia’s kleptocracy, China’s communist tycoons, or India’s accountant-plagued business culture.

So if Brazil crashes again, a powerful lot of hopes go down too. Six months into her new mandate, is President Dilma Rousseff losing the plot?

Will she turn out to be a reincarnation of the iconic 1956-1961 era President Juscelino Kubitschek?  His “50 years of progress in five” slogan boosted Brazil into a golden era of development still visible in graceful architecture and institutions such as the capital Brasília.

Or will she turn out to be a latterday Ernesto Geisel, the military dictatorship era leader of the mid 1970s (whose regime Rousseff herself fought as an armed urban guerrilla)? During Geisel’s tinsel-bright but paper-thin “economic miracle,” Concorde plied its way to Rio, trophy projects went up and up – and so did a mountain of borrowing. By 1982 the whole edifice collapsed under the emerging market debt crisis.

Getting it right really matters to me.

From 1982 – 1991 I witnessed the dark side of a failed miracle at close quarters, travelling Brazil from end to end with my reporter’s notebook. I interviewed ministers, presidents, and hundreds of economists. I wrote many articles for The Economist. (Mea culpa: many of my predictions were as wrong as the paper’s). But as a foreign correspondent, I was still an outsider.

Now, I have real “skin in the game.” Since 2009 I’m back, not as an observer but as a tiny cog in the great wheel of the Brazilian economy. We have a local Brazilian business to run, which depends crucially on business confidence and the nation’s macroeconomic health. We have employees to pay, a brand to nurture, clients to serve, a reputation to protect.

So Dilma’s success is my success. And my radar is constantly sweeping over the “small stuff” at street level.

I get nervous when I see that the very same Brazilian mango from Petrolina costs more to buy at the Quitanda in Vila Madalena than it does here in London.

I get nervous when my Itaú bank manager casually offers me a “safe retail” investment product that blends fixed income with a bet on the stock market using put/call options, knockout spreads, exotic equity kickers and lord knows what else.

So who do I believe in – economists or The Economist? Well, neither, actually. More and more, I go with the “Voice of the People”, “Wisdom of Crowds” or just plain informed street level gossip about “small stuff.”

On political stories, every foreign correspondent learns to interview his taxi driver when leaving the airport – then discount 50% of the pessimism and rightwing bias. For economic pieces, the rule is that if the same cabbie makes more than four airport trips a day, the local economy’s overheating; two or less and it’s tanked.

The last airport cab I took in São Paulo (fare R$ 110) left me flummoxed.

Passenger: “How many airport trips today, compadre?”

Driver: “Well, I would have made six or eight, but I got stuck for four hours in traffic so it’s just you. All this consumer credit has put a million new cars on the road just this quarter. Because of the traffic jams I can’t get enough rides to pay off my auto financing plan.”

The late-model air conditioned cab had leather seats and upfront looked like the Challenger cockpit. The driver’s dash had a GPS, two handsfree cellphones, PDF digital link to his office, an onboard TV – and in the back seat there was a 3G tablet for me to browse the web in heavy traffic. The guy told me he needed to earn R$ 500 (US$320) a day just to stay on the road. The cab license plate now costs over R$100,000 ($63,400). Still below New York City medallion rates but closing fast.

Pity my Paulista cabbie: Pity the urban über-middle classes too. The cost of their fixed service infrastructure of security guards, apartment concierges, drivers, cleaners, cooks, car park attendants – and above all nannies – is spiralling upwards to make  life in São Paulo costlier than New York.

The official data shows unemployment down to 6.5% and official wage inflation topping 7.5%. Truth is nobody in São Paulo’s service industries is getting the official minimum salary of R$ 610 (US$387). Most get three times that.

Where the rubber really hits the road is the Paulista nanny-circuit. Here, you can’t get the help for love  — or even for lots and lots of money. Brazil’s classier nannies have their employers over a barrel, charging US$3,100 a month or more.

Even the New York Times is writing about the skulduggery, pitched battles and downright treachery of Paulista moms vying to retain, obtain or poach babas and empregadas in a world of spiralling salaries.

But just like my cabbie stuck in traffic, Brazil’s working upper middle-class moms have no escape and they’re becoming poorer, caged in their opulent surroundings.

Somebody must care and cook for their darlings, because the moms won’t or can’t. Despite its modern veneer, the embedded culture and lifestyle of privileged Brazil has depended on availability of plentiful and cheap servants ever since the first shipload of slaves arrived from Africa.

The slaves stopped coming from Africa five generations ago and one generation ago from the Northeast. Or rather, they have started charging a proper market rate in an over-heated economy. Nannies are now middle class!

After all, the Brazilian nanny herself is now an important consumer too. That means she needs a healthy salary to make her own credit payments for the apartment, the new car, the color TV, the cable, the laptop, her own children’s school, the airfare for the (novel) annual trip to visit family the Northeast. Maybe she goes to a gym, and has two cellphones (many working class Brazilians tote four to get the best call discounts).

I salute the rise of the Brazilian nanny as a huge achievement in terms of economic freedom, citizenship and a flowering of her human rights. This a better example of democracy than much of  what goes on in Brasília’s Congresso Nacional.

I salute the courage of middle-aged, middle-class professionals who bravely traded their layoff or superannuation payments for gadget-enriched taxis in which to brave São Paulo’s highways in search of fares.

I really, really want The Economist to be wrong, and the economists to be right. I want The Economist to be as wrong as the Californian who predicted the Rapture bringing end of the world on May 21st this year.

But my own street-eye view also has a red light flashing.

Brazil has a knack of weathering political uncertainties so I’m not worried about the stormclouds – even with an untried and uncertain leader at the helm. And a presidential chief minister, Antonio Palocci, who has fallen ignominiously from power because he chose to take consulting fees before starting government work, rather than after leaving it. After all Dilma’s godfather – ex-president Lula, will be ferocious in protecting a protégé who is keeping the seat warm for his own 2016 comeback.

But the street-level economics scares me. I fear the consequences of this metastasizing growth process in a country still dependent upon the creaking old infrastructure built in the pre-debt crisis Geisel era; and burdened with an outdated system of privilege now blindsided by massive demographic change.

Today’s movers and shakers simply haven’t woken up to tomorrow’s political and economic consequences of what happens when the nannies and the cab-drivers – Brazil’s burgeoning new middle classes – really flex their muscle.

Dammit, my former colleagues in St James’ Street might just have a point.

Richard House was Brazil correspondent for the Washington Post 1982 – 1991 and he also wrote regularly for The Economist.


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