Strictly Counter-Cyclical: Latin America forgets the old economic dance tunes


Filmstar Alice Braga helped me change my mind. But it’s really not what you’re thinking….

Three weeks ago I was writing: “when economists aren’t getting it wrong, they’re usually changing their minds.” I published a piece on June 8th entitled “Brazil’s Economy: Towering or Tanking?” I assembled the prosecution evidence that things were overheating dangerously.

But thanks to the fabulous Alice, I’ll concede maybe the one doing the overheating is me. In general, I’m not keen on second generation starlets, all-action stereotypes or the kinds of movies she appears in, but let me explain why she made me think again.

“I’m a global Latin American” is the boast of the impossibly glamorous poster girls or boys flying the flag in display ads for Banco Itaú. The actress figures prominently in this slick but ever-so slightly cheesy international print media campaign.

The intended message may be simply that Itaú banks the cheques of a gorgeous-looking band of young latino fashion designers, polo playboys, ballet dancers, actors and artists who’ve become famous in New York, California or Europe. Or that while the world’s 10th largest bank follows its elite clients overseas, their loyalty is such that they still gratefully bank at home.

But the abiding message of this campaign by Latin America’s third most valuable brand may be unintended: Latin America is now an integral part of the new global economy – with all that implies.

Back in 2001, Brazil looked the eccentric pick in Goldman Sachs research chief Jim O’Neil’s ‘gang of four,’ that soon became known as the BRIC nations. And ten years ago, there was no such creature as a “global Latin American,” except perhaps a tiny handful of opera singers and financiers.

That was because Brazil had bucked the global trend for decades. When the rest of the world was doing well, Brazil fared badly – and vice versa. A succession of stock market booms passed by ailing Brazil in the 80s and even the 90s. Conversely while the developed world swooned in the 60s and 70s, Brazil boomed. And while the credit crunch started blighting the US economy in 2007, Brazil just kept on growing.

As ex-president Lula proudly told international audiences in 2009, by the time the global economic tsunami reached his shores, Brazil felt no more than a gentle ripple – thanks in part to a gargantuan sea-wall built of federal spending, ballooning BNDES credit lines, and the Bolsa Familia cash distribution programme.

For foreign investors, Brazil is today probably the most comprehensible of the BRIC group. That’s because it has at last shaken off the “counter-cyclical curse,” and as a global player, Brazil is finally dancing to the same macro-economic beat as the rest of the world.

That brings challenges – and a potential solution to the current economic overheating of the Brazilian economy.

So why is it good news that the old counter-cyclical story has run out of road? Under the old logic, if the United States continues to do badly – and it will – that means Brazil will do well. Too well in fact. That got folks worried.

Although an official from Brasília’s finance ministry this week drafted a snooty reply to rebut The Economist’s recent charge that warning lights were flashing for the Brazilian economy, it’s widely acknowledged that bottlenecks and capacity constraints threaten stability.

Brasília’s policymakers and opportunist politicians were never going to have the courage by themselves to fling a bucket of icy water on this mighty carnival, cooling rising inflation and restraining the turbo-charged monster of consumer demand. Somebody else would have to do the dirty work.

Step forward China. Every economic weathervane suggests the wind from China – which manufactures one fifth of the world’s goods – is cooling. It means all those who depend upon China’s growth will feel cool winds too.

What happens in China, affects everyone who is now locked into its economic orbit – that includes everyone who in Itaú’s artful phrase is a “global Latin American.” Hence my change of mind.

Once again, The Economist tends to see the glass half empty, attributing US and EU woes to a cooler China. Most of the fuss has been about China’s rising economic strength relative to the US is caused by the fact that American growth is too feeble.

Others feel it too: Australia is a case in point. Because the lion’s share of Australian GDP growth depends on China, there’s a realistic expectation of a ‘hard landing’ for those who depend on Beijing’s health and wealth.

But what about a country whose growth is already too strong? There have been few economic commentaries about Brazil’s economic status relative to China. Or the fact that an intra-BRIC trade pattern has effectively decoupled from the old US hegemony.

With bilateral trade with US$56 billion and a 5$ billion surplus for Brazil, China is now a bigger partner than the US.

Fact is, Brazil now moves in lockstep with China, not the US. So if Beijing is an economic motor for Brazil, then whenever the Chinese brakes come on, Brazil goes flying through the windshield.

Or not. Like the end of a sweltering December day in Rio that’s way too hot, things are set to cool quite nicely later on. Thanks to China.

What could this mean for Brazil’s prospects? The numbers all say Brazil’s economic surge is containable in 2011: inflation at 6.2%; money supply growth down to 16.7%; $35.8 billion of primary surplus in the tax coffers; a budget deficit below 2% (dream on – France, Spain, the US).

Cool or hot, the numbers don’t say it all.

The real issue is how it feels to live in what is clearly a stressed-out economy. Whatever the numbers say, it’s no fun. My earlier posting moaned about blocked airports, jammed roads, overpriced stuff, a fast-declining real standard of living among my friends.

I lamented that Brazil’s middle classes were now caught like golden hamsters on a golden wheel, striving to pay for overpriced and often unnecessary services caused by overpriced salaries from unnecessary employees. Not to mention a currency that’s as over-valued as China’s is accused of being under-valued.

That thought went further: this week I found myself agreeing with another London-based Brazil expert. Both of us were quietly inventing excuses not to travel to São Paulo. For over 25 years, both of us had been straining at the leash like greyhounds to get back there, when we hadn’t actually been living there.

Now we can fly whenever we want, we know that São Paulo, the capital city of global Latin Americans, is about the most stressful urban environment – Misrata and Gaza City excepted. That’s the real reason why, although Brazil’s economy may not be about to boil over, my patience did.

I know I can’t have the older, slower Brazil back. But the idea of being able to have dinner in a restaurant without waiting two hours for a table does fill me with saudades. So does getting a Ponte Aerea to Rio that both leaves and arrives on time.

A chill wind from China won’t bring back the past. But if it changes Brazil’s economic soundtrack from today’s relentless technobeat back to something just a little more like the old samba-reggae or even MPB, I’ll be on that plane tomorrow. And even though her tough-cookie action movies aren’t my thing and I’m not quite in the same league as her screen partners Will Smith or Jude Law, maybe I’ll ask Alice Braga to dance. Something strictly counter-cyclical, I hope.

Richard House

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