America and Brazilian parallels

Why is it that the gap between rich and poor is so wide in both Brazil and America? Does education, especially private, play a similar role in both countries?

Two Americas
Nov 12th 2009
From The Economist print edition

Brazil and the United States have more in common than they seem to
LIVING in Brazil, it is easy to imagine that you have been transported into one of those novels with alternative endings—in this instance, about how the United States might have developed if a few things had turned out differently. Both are continent-sized countries in the western hemisphere with federal democracies in which state governments have considerable power. Both were colonised by small European seafaring nations before gaining independence within 50 years of each other. Their populations are made up of the descendants of their original inhabitants, early colonists and African slaves, topped up later by European and then Asian migrants. A recent influx from neighbouring countries completes the mix. Brazil’s melting pot is, if anything, even more successful than America’s. There is no such thing as a hyphenated Brazilian.

Both countries seem surprisingly religious to European eyes, with different Christian sects competing vigorously for believers. The most successful Brazilian multinational of all may be the Universal Church of the Kingdom of God, a Pentecostal outfit that keeps being investigated for overenthusiastic marketing and opaque book-keeping. Both places show a strong preference for consumption over saving when times are good. Brazil has a culture all of its own, but it looks for inspiration to America more than it does to its Spanish-speaking neighbours.

A place of paradoxes
And yet the differences are stark. America is rich, Brazil poor. Brazil is more left-wing. America fights wars, Brazil does not. America likes its capitalism as unbridled as possible, Brazil prefers its markets with a strong government presence.

Look more closely, though, and some of these distinctions become blurred. Brazil is more left-wing in theory than in practice. Next year’s presidential election is likely to come down to a choice between a candidate from the left-wing Workers’ Party and the centre-left Party of Brazilian Social Democracy. Even so, most of the money the government spends goes to people who are comparatively wealthy. The biggest single reason for the difference in income distribution between Brazil and America is more regressive public spending in Brazil. “We live in a paradoxical situation of a government that spends a lot and benefits a few,” said Antonio Palocci on becoming finance minister in 2003.

Since then some more public money has found its way to Brazil’s poorest, but proportionately the amounts remain small. In fact, Brazil has rather a lot of public policies that would be considered unfair and regressive in America. Children whose parents can afford to send them to good private schools tend to get the pick of places at good publicly funded universities, whereas children from poorer families often have to pay to go to less good places. The BNDES transfers money from low-paid workers to the balance-sheets of Brazil’s large companies. It has supported JBS-Friboi’s transformation into the world’s largest producer of protein, which the company has accomplished through acquisitions in America. Yet the group remains privately owned: a bizarre appropriation of public resources that would cause an outcry in other countries.

Brazilians also have a more American approach to capitalism and free markets than they might appear to at first sight. Many of their country’s success stories of the past 15 years, from the free-floating real and the autonomous central bank to the privatisation of state-controlled firms that have since flourished, are products of a similar way of thinking about what economic arrangements work best. To his credit, President Lula has not reversed these changes, as many feared he might.

The clash between a growing middle class and a government that often seems to be blocking its aspirations is creating a rather American story about the determined little guy being constantly pulled back by the dead hand of bureaucracy. Many of the younger businessmen and bankers in Brazil have postgraduate qualifications from American business schools. Quite a few hold views that would not be out of place at the American Enterprise Institute or other free-market think-tanks.

If America’s doubts about free markets and Brazil’s confidence in them both continue to grow, the two may shortly meet (see chart 7). Even President Lula now denounces protectionism, though many foreign governments, noting Brazil’s still fairly high import taxes, are unconvinced. Brazil’s imports and exports taken together were equivalent to 22% of its GDP in 2007, compared with 23% for America. Above all, Brazil now seems confident that a more open economy will not condemn it to a role as coffee-maker to richer countries.

The future of the country of the future
Yet if Brazil has at last discovered a formula for releasing its wealth, it is also true that most of the country’s economic successes are clustered around the commodity sector. Brazil has created no car or computer companies with big sales abroad. Embraer is an isolated example of a big high-tech exporter. The same can be said of the services sector. That is a pity for a country vibrant with creativity and invention.

Pockets of the commodity sector, such as Petrobras’s deepwater drilling, do require high levels of technical expertise. But Brazil’s obstructive government seems to confine its businesses to competing internationally only in sectors where natural advantages make them close to unbeatable. Judged against its own past, Brazil is doing astonishingly well. Judged against its potential, it still fares poorly.

Allowing for its size, Brazil spends much less than the OECD average on research and development, and most of that spending comes from the government: the public sector accounts for some 55% of investment in technological innovation. South Korea, with a population a quarter the size of Brazil’s, registers about 30 times as many patents. Brazil needs to do something about this: in order to live with the strong currency that comes with success under a free-floating exchange rate, it must raise productivity.

Like America, Brazil is so big and varied that it often seems to contain at least two separate countries. One of these is a place with ten land borders and no wars where people speak a single language in compressed time zones; where there is no religious conflict; and where three-quarters of the population turns out to vote, with election results announced the following day. This country has sophisticated economic policymaking and financial markets, as well as a growing collection of world-beating companies. It runs on sushi and is usually suntanned.

The other Brazil has a stubbornly high murder rate and a violent police force. Many of its politicians see nothing wrong with stealing public money or appointing relatives to jobs within their private kingdoms, and refuse to resign when found out. It is a place of misery where 17% of homes do not have running water and too many families live in home-made shacks by motorway bridges. A place where many people convicted of serious crimes go unpunished, and those in prison live out a brutalised existence. And a place of environmental devastation that government is powerless to stop.

Because this special report deals with business and finance, it has concentrated on the first place, but both Brazils are part of the great green elbow that sticks out into the Atlantic. What makes the country so exciting at the moment is that, thanks to its newfound stability, Brazil’s better self now has a much greater chance of prevailing.