At last, I see some realism in the financial press about the short to medium term prospects for the Brazilian economy. I read a recent FT analysis with some incredulity, as the paper – like many other normally reliable sources – seemed to have taken leave of its senses.
There is very little good to dig out from the steaming economic pile the country finds itself in after a decade of total fiscal mismanagement. Not only has there been a lack of investment in desperately needed infrastructure. Not only has there been a failure to tackle corruption in any meaningful way. But everyone continues to ignore the harsh fact that the basic systems in Brazil remain hopelessly dysfunctional. Raising the interest rates is not the end of the matter, as the FT seems to believe. Far from it – it is merely scratching the surface to expose the rot underneath.
Consider that the State of Sao Paulo, with – now get this – 20 million souls (or the same as the whole of Australia), has no water. This is – or should be – a simply staggering fact on its own, never mind when combined with the fact that most of the country’s woefully inefficient industries rely on electricity generated from – you guessed it – water. And how much has been invested in energy conservation over the last ten or twenty years? Zilch. Energy has been so cheap, and the potential for more – water powered – energy so great, that there has never been any interest in conserving anything. Well, uh, now what, people..?
Something else the financial press seems to overlook are the fundamentals. I do not mean the usual financial fundamentals, but the real fundamentals – the people, the culture – that drive a country in one direction or another. Most countries have their stereotypical population characteristics (Japanese innovation, British determination, German efficiency etc), and if we look closely at Brazil we may find a lot of nice, pleasant things, but nothing that suggests even remotely that there is some sort of spirit that will keep the country on the rails.
Okay, so perhaps we cannot expect the Wall Street Journal to know about this sort of stuff, but we should, I think, expect them to realise that what we have here is an inexorable slow motion train crash, with inevitable results. After all, none of these issues is exactly hidden, except from a largely uneducated, uninterested, stupidly rich, idle and corrupt Brazilian political class:
- A weak infrastructure
- A breakdown in the supply of basic utilities
- A protectionist state where there is no industry; no value added
- A collapse in demand for commodities
- Dysfunctional legal, financial, health and education systems
- A hopeless bureaucracy and bloated civil service
- Corruption on a simply massive individual and collective scale
Now, given these issues, can anyone believe that hiking the interest rates up a few basis points can have any sort of realistic impact? Really? Or is there, in the immortal words of Leo Bloom, “no way out”? Well I believe the financial markets are in the process of making up their own minds thank-you-very-much, and money is fairly bleeding out of the country as we speak. Modigliani and Miller would be proud .
It is tempting to be trite about it all. It is tempting – especially when you live here in the middle of the pile – to point and say “I told you so” (and in fact it is at least superficially satisfying to say it – okay, so I never said I was perfect). But really, it is difficult to find something constructive to say about the situation. What is to be done? What would you do, other than run away?
A few moments thought might generate the sort of list below for building something out of the wreckage that is heading our way. It is all stuff that Brazil really needs to look at seriously and urgently, but which recent governments have failed spectacularly to address:
- Raise consumer interest rates, but provide grants to industry
- Reform the civil service, freeze pay rises and pensions, and make civil servants accountable to the public
- Dismantle most of the trades and employers unions
- Remove trade barriers
- Reform the tax and legal systems
- Publish every public financial transaction
- Stop building dams and use the money for energy conservation and policing the rainforest and watersheds . Invest in and provide incentives for serious energy conservation.
- Leverage hundreds of years of experience and ask for outside assistance, taking gringo advice when it’s good
- Reform the police pay systems, retrain the police, give them the tools needed, and make them accountable to the public for reducing crime
- Provide permanent visas for any skilled workers wanting to enter Brazil
- Abandon systems based on mutual mistrust and replace with trust-based systems.
- Allow anyone to worship any god or church they like, and then keep them the hell away from the people running the country
I could go on, but perhaps it would be better to wait until we see what happens on March 15th, when there is supposed to be a national demonstration against the government – indeed a demonstration demanding the President’s impeachment. Two million people came out onto the streets the last time (2013), and I wonder how many will turn out on the Sunday before St. Patrick’s Day. I suspect it will be a lot more. I also suspect that unless the government does some serious grovelling and takes some decent, honest action, we could be looking at an event that will define Brazil for the decades to come. Although there are few in the press who dare to mention it, a glance at any of the social media will show that there are a lot of people out there happy to bandy around the concept of a military coup.
And that really is playing with fire…