Learning the Brazilian Samba

Brazil is one of four rapidly-growing economies – known as BRIC (Brazil, Russia, India, and China) – whose combined GDP is expected to comprise 44% of the world’s total by 2050. Her current standing, however is more significant considering her battle with hyperinflation from the 1980s-1990s, which we can learn from.

Hero to Zero

Brazil's economy surged during the 1950s-1960s. Pursuing Import Substitution Industrialization (ISI) strategies, her average 7.4% GDP grew 7% annually, making her economy the world's 9th. Riding on this, she embarked on profligate spending, like constructing the new capital, Brasilia, in 1956, and willingly accepting multilateral loans from the World Bank.

But while ISI fast-tracked industrialization, currency overvaluation bloated imports and marginalized exports. This massive industrial expansion, brought a trade imbalance, increased debt service, and public sector overspending, triggering inflation.

By 1980, Brazil, like Argentina, had massive foreign debt ($54 billion), which Exports and Tax revenues could not cover, depleting Currency reserves. Inflation raged despite the Government's propping the Cruzeiro–Dollar exchange rate, and indexing wages to inflation. Averaging 220% from 1980-1998, inflation zoomed to 30,377% in 1990.

No Overnight Success

Finance Minister Fernando Cardoso was instrumental in taming Brazil’s hyperinflation, with the 1994 Plano Real. It was an arduous climb that began with stabilizing the currency through the new Unidade Real de Valor (URV), a non-monetary unit insulated from pre-emptive, inflationary speculation caused by the Cruzeiro-US Dollar index. Part of the Plano Real's success was that the citizens were adequately informed via a mass-media campaign.

Cardoso's austerity measures defied the World Bank and the IMF's neoliberalist prescriptions, which he viewed as promoting development ungrounded in Latin American context, instead of social policy. Borrowing from his predecessors, he espoused the establishment of physical and social infrastructure – pump-priming development and “social safety nets,” (following perhaps a 1978 Deng Xiao Ping model) to address Brazilian society, which he considered “ill-fare” rather than welfare, state.

His programs decentralized social welfare distribution. After the Plano Real stabilized the currency, cash transfer programs were established (aimed at specific groups), as were incentives - rewarding both the achievement of distribution goals, and cooperation between Governmental institutions.

Reforms were enacted even if modifying the Constitution was required; the newly promulgated 1988 charter had by 2007, been changed 53 times. Why not Cha-cha now, following the Brazilian samba, to attract things like foreign ownership of lands.

After Cardoso's two terms, the income disparity remained large, but Inflation had droppe from: 2,294% (1995) to 7.2% (1997).

Today, Brazil’s $1.3 trillion GDP grows 4.5% annually. Learning from her survival of hyperinflation may lead down the BRIC road.

Lesson 1: Learn from Cardoso

Our Administration has already been establishing social safety nets, exhibited during the recent Oil and Food Crises, in proactive anticipation of a hyperinflation environment. It used P2 billion of Oil EVAT for a Php500 power subsidy, while resisting populist calls to legislate wage hikes and abolish Oil EVAT despite skyrocketing pump prices; recognizing that the palliative of EVAT abolishment would remove the country's ability to “ride out the world food and energy crisis.”

Exceeding Cardoso's economic paradigm, it has invested in public good through infrastructure and food security programs (utilizing Php4 billion from Malampaya national revenues, and Php6 billion for farm-to-market roads). By fiscal priming through infrastructure, businesses and businessmen will follow, following the Chinese model.

The safety nets are set, but the characteristic foresight is still paying dividends. Originally intended to weather the Food and Energy crises, it helped protect us from the Financial crisis. Recently, the ADB stated that the Philippines will escape recession in 2009.

Lesson 2: Gateway Philippines

The Philippines is the gateway between two continents, Asia and South America, a funnel for the net monies shifting from South-South or East-South.

The Philippines is a closer, straighter destination, than Singapore. With prospective International Airports, Ports, bridges and roads within two years, we are better-placed than Singapore; and our Asian-Hispanic heritage is advantageous in dealing with either market.

In exchange for relocating their Singapore-based regional offices (like Petrobras Singapore Pte. Ltd.), perhaps Brazil can share two decades of research behind their thigh-girth sugarcane driving their ethanol industry; or Colombia, their seven major Arabica coffee varieties.

The Brazilian lesson emphasizes the Latin American markets' value, and our economic and geographic advantage in the Pacific century. It also highlights this administration's discipline and austere character (evident through Her daughter, whose wedding, instead of becoming a social networking event, had only 26 guests).

On protecting our country during this crisis of advanced economies, there is a Spanish saying “Nunca retrocedan ni para coger fuerzas”...never take a step backward, not even to gain momentum. The Filipino Entrepreneurs must lead Asians in promoting South-South opportunities.

More in the next article.

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