Lula's Economic Model to Reach its Limit?

The Financial Times has a new article casting doubts on the ability of ex-president Lula's economic model to continue producing strong growth in Brazil.

As defined in the article, the Lula model is the "combination of social welfare hand-outs, generous pay rises, easy access to credit and stable economic management". His "neoliberal" predecessor having righted the economy in the 90s (which was suffering from hyperinflation), the previously radical Lula left the macroeconomic system as it was and introduced a shift in focus from reforming the state to increasing its size and its welfare expenditures on the poor.

The model has worked well until now. Consumer credit has increased drastically over the last decade, but from levels so small that few have seen much risk in them. The increase in welfare has made life better for millions, and the poor spend this money and help keep the economy spinning. And strong confidence in Brazil's economic policies has brought in more foreign investment.

But there are reasons for concern. While loyal followers are prone to babble on with phrases to the tune of "Lula is a better economist than the economists", many refuse to see the important dose of luck that has benefitted the country in recent years, and the FT article does a very good job of pointing this out. Most specifically, Brazil, whose major export is agricultural commodities, has enjoyed years of high growth due largely to booming demand from China (Brazil's biggest trading partner) and other developing markets. In exchange, Brazil imports an incredible amount of consumer goods from China, households become better equipped with furniture and electronics, and people are satisfied as long as things keep growing. But will the commodity boom last forever?

One concern is the relationship between inflation and the value of Brazilian currency. The real has increased in value constantly over the year, as investors have been attracted by high interest rates. The government cannot reduce interest rates due to fears of inflation, so they rely on taxes and other means to reduce the influx of foreign capital. But this maneuver is no longer successful in limiting the real's rise, and Forbes recently reported that the Brazilian government is unlikely to fight the rise of the real effectively given fears of inflation. This will continue to hurt the competitiveness of Brazilian exports.

The FT points out that the state comprises 40% of GDP, but does not confer the same benefits as similarly expensive governments in more developed countries, because it is extremely inefficient. This is most clearly seen in the case of public works projects. The city of Salvador, for example, boasts the most expensive commuter train system in the entire world, per kilometer of track; it was originally alloted R$1 billion to create 41 kilometers of track, but it ended spending that entire amount (and an entire decade of time) to construct 6.7 kilometers, and even then it was not yet functional. The process involved fraud and cartels in the bidding process as well. It is among the worst managed public works projects in the history of mankind. And preparations for the World Cup seem likely to increase the number of public embarrassments. Not only is the country able to muster relatively little money to finance investment, but when it does it simply cannot target the money without bleeding it out to corrupt bureaucrats and their friends. After some reforms made by the presidents prior, one of Lula's legacies will be a commitment to the fast growth of the state, which has expanding to 24 ministries, up from 13 in the 1990s.

Though credit has not traditionally been seen as a threat, that may be beginning to change. A credit watch agency revealed recently a 22% rise in bad loans, and some suspect a possible credit bubble, though the FT notes that loans are far safer and more frequently collateralized in Brazil, reducing the risk. But even if the result is not a crisis, it is at least worth considering that consumers are going to reach their limit and that credit will falter as a contributor to strong growth.

The article does not go into what lies in store as Brazil transitions into an oil economy. But the major lesson of the recent success of Brazil is worth taking into account: luck propelled Brazil in recent years a lot more than most people seem to think. We'll see how Brazil does when its luck changes.

Portugal Circa 1800: An Incredibly Crappy Country

Brazilians I know have an animosity towards Portugal that I've never understood. It comes out only every once in a while, especially during the World Cup. They get riled up and say things like "That lousy Portugal never invested even a cent in Brazil!"

Which stirs a variety of thoughts. First of all, why would they? Brazil was a colony and Portugal was a tiny country that desperately needed cash to defend itself and stay afloat. Who could realistically expect Portugal to make philanthropic investments in Brazil if Brazil existed as a colony only for the benefit of Portugal? And on the other hand, aren't many of the people complaining the descendants of these same Portuguese? It's like chimps blaming bonobos (to be clear, I am not claiming that Brazilian are similar to chimps) for things not having turned out the way they wanted. And finally, you don't see most sane Americans still grumbling about the British, despite their repression of the American colonists. Does it really make sense to still hate Portugal for Brazil's underdevelopment?

Yes, it probably does. I had no idea how thoroughly crappy of a country Portugal actually was in the colonial era until I picked up a recent book called "1808", a Brazilian history book by journalist Laurentino Gomes about the year in which the Portuguese crown fled Europe under threat from Napoleon and ruled its Empire from Brazil for a spell. Boy, was Portugal crappy! Some relevant points from the book:

--Portugal circa 1800 was the most Catholic country in Europe. 10% of the country's population "belonged to religious orders or remained dependent on monastic institutions in some form". The incredibly hegemony of Catholicism in the country had a number of ill events, such as...
--Portugal was incredibly averse to science and medicine. In fact, the man who was to be prince at the time (1808), the older brother of the prince Dom João, died from smallpox. His mother did not have him vaccinated due to the believe that medicine should not intervene in matters to be decided by god.
--Portugal roundly rejected freedom of thought and/or speech. It was the last country to continue with the inquisition, including barbaric executions of doubters of church doctrine (including witches, Moors, Jews, and the like).
--The country was profoundly illiterate and uneducated. It produced no great thinkers during the time of the American and French revolutions (though the inquisition did kick some writers and poets out). However, the same country had produced innovations in navigation and great adventurers 300 years prior, indicating that it was the country's intellectual climate as dictated by church and state, and not its population, that was at fault.

If it managed its own people in Portugal so badly, you can only imagine the situation in Brazil. The colony was used for the extraction of mineral goods along with tobacco, sugar and slaves, all of which was done so as to bring in as much revenue up front as possible, which did not encourage any innovation of any type. Brazil was divided up into a number of sub-colonies (captaincies), and the governor of Brazil was instructed to avoid allowing each of them to speak to each other. Books were frowned upon and publishing was impossible. Literacy rates were in the single digits. Foreigners, including German explorer Alexander von Humboldt, were looked on with suspicion and official communication to governors warned them to beware anyone that might "excite" the population. The major Brazilian newspaper of the time, the Correio Braziliense, was published from London since it could not be published in Brazil. Furthermore, the emperor bought off the publisher with a stipend in order to guarantee good press. Expressing ideas in public and even meeting in public was an offense that could result in one being shipped off to Africa. A Literary Society was formed in Rio in the late 1700's with official contributions. But soon after it was broken up when suspicion arose that the group, which largely discussed science and literature, was plotting a coup against the monarchy. Several of the suspects (society lawyers and doctors and the like) spent years in prison for participating in the book club.

In sum, the organization of Brazil pretty much revolved around suppressing communication and new ideas, and the compounded total crappiness of the existence of the mainstream Portuguese and Brazilian populations certainly outshone their British and American counterparts. I will no longer question Brazilians when they complain about the bad influence of the Portuguese in Brazil.

Jaguarari through time

The small city where my in-laws live, Jaguarari, gives me the impression that it hasn't changed much over the years. The population is expanding and houses are reaching up the hills somewhat, and the old pastureland behind my in-laws' house has been parceled out to become new houses. But on the other hand, the city has no industry, new houses look the same as old ones, and new businesses are typically more of the same (a new bakery, bar or restaurant that sells the same things as the rest). Since 2007 (the first year I saw it), the traditional Saint John festival in June has hired more expensive bands, but otherwise been the same.

Nevertheless, recent conversations have started to give me a better idea of just how much things have changed. My mother-in-law grew up outside the city, a 90-minute walk over the hills, in a mud-and-stick house in what was at the time a coffee-growing community. The house still stands decades later, but no one lives in it. All the inhabited houses are made of bricks and concrete, and running water is being hooked up now. The few people that still live in the little community (most have moved into the city center leaving only a ) have given up on coffee and focus mostly on bananas, complemented by honey and a few other fruits.

The path between this community and the main part of Jaguarari is fairly lush and hilly, compared with the flat and dry cactus-strewn sertão that surrounds it. But it isn't what it used to be, or so they say. Apparently many plant and animal species have been lost during decades of land clearing for cattle pasture. My mother-in-law told me a story about a young girl she was friends with as a child, who used to also steal her lunch from the pot first, before anyone else had sat down at the table. The girl's mother resolved to put an end to this, and one day put a "dragon" in the stew. Apparently a "dragon" is a bat-like beast (but not a bat, I asked several times to make sure) that is incredibly ugly, but no longer exists in the region. In any case, the girl was severely traumatized by finding it in the stew and never again ate before the rest of the family.

Besides dragons, the region of decades past also included the presence of a shape-shifter, who would play tricks on the children by turning into trees and spying on them, and of course the infamous "cangaceiro" bandits of the 1930's, the most notorious of which was Lampião. Lampião reportedly tried to invade Jaguarari at some point, but the hills closed in to form a wall that kept him out. (Readers should not that there probably isn't a single city in Northeastern Brazil that doesn't have an outrageous story involving Lampião)

As incredible as those stories are, they are easier to believe than a story my father-in-law tells me; that education in Jaguarari is much worse than it was in his time. Given the isolation of the area, the difficulty of imagining how exactly students will apply what they learn in chemistry class, and the fact that, as semi-literate as the region is right now, the young population is certainly far ahead of the older population, I just can't believe this. School attendance rates in his time, which would be the 60s and 70s, were far lower then. I attribute this story to bias or rising standards for education, which make failure more apparent if not more frequent.

As recently as the 1980's, the central area of Jaguarari (which includes a nice and well maintained series of public squares that serve as a general meeting place as well as a space for concerts, sports, and all manner of other events and competitions) was just a rough dirt patch. It still held concerts though, and the excellent northeastern musician Zé Ramalho even gave concerts back then.

Old traditions have died out. My wife tells me about how terrified she used to be during Carnaval in Jaguarari. It was nothing like the famous Carnaval of Rio though -- it was mostly old timers fashioning scary costumes and running from house to house to terrorize kids. Moms would give them a few bucks to go away, and the money would be used to pay for the costumes and keep the tradition going. But once the new generation was hooked on TV and video games, no one is interested in parties or traditions that don't revolve around famous bands playing in the square.

More recently, the region was significantly influenced by a population of Gypsies until the mid-1990s or so. According to my mother-in-law, they first lived in tents outside of town and, as time went on, moved into houses. Either they become richer and richer, or more and more willing to flaunt their enormous wealth. Gold teeth and loan sharking were popular on the one hand, and stealing from the outdoor market on the other. All of it was very recognizable from the international reputation of Gypsies. In any case, around 15-20 years ago they packed up and moved to Juazeiro, a bigger city to the north, reportedly in part because of growing friction with the community -- the governor at the time took measures to make sure that they left. The local graveyard apparently still has lots of luxury goods that have been left behind by the graves of dead Gypsies.

--

My temptation is generally to think that things don't change too much in these small towns, and that development is going to be very hard for Brazil's arid interior to achieve. Nevertheless, it's easy to see how much really changes in a generation, for better or for worse. Though the picture that comes to mind when I think of the year 2030 is pretty much what it is now but with more computers and fewer young people (due to declining birth rates and accelerated migration to bigger cities), there must be some surprises in store that I can't imagine.

Vote Buying in Bahia vs Polarization in the US

Here goes a link with a good and brief description of some political aspects of Brazil (or at least the state of Bahia), coming from a paper :
http://iis-db.stanford.edu/pubs/23028/No_119_Varieties_of_ClientelismCDDRL.pdf

The section relevant to Brazil starts on page 24.

Political polarization in the United States at least seems to outdo itself even more outrageously each time around, from the Clinton years to the current budget fiasco. But which is worse for a country's development, a situation of complete polarization, where political change can come only with slow-changing demographics, or complete apathy, where money buys everything?

I realize that the US and the Brazilian state of Bahia don't fit these descriptions exactly, but they are pretty close. Here in Bahia, voters are nakedly for sale. Though strong trends towards Evangelicalism can change this further down the road, for now it appears that very few people care about party affiliation. If they do, it is generally insofar as a party at the municipal level may get more resources if it is aligned with the same party at the state and federal levels. A partial exception to this might be the Worker's Party, which could garner more support among young people due to its association with the extremely popular ex-president Lula. But I believe that even this is limited in the region, and I've never seen almost any evidence of a party platform or ideology during a local campaign. The article cited above notes that in Brazil, only 10% of people are affiliated with political parties. Even the politicians didn't care much for keeping party affiliation traditionally, leaving it to the highest bidder, but new legislation may influence that. For working adults, what matters is not which candidate will adopt policies that will make the city better for their children, but which will put more money in their pockets next year. If this isn't done directly with cash, it's done with government jobs, which in these small towns in the interior account for an enormous portion of the total. Statistics show that "public administration" accounts for over 25% of the GDP of the city of Capim Grosso, for example. And I know that over half that money goes to payroll (the legal limit is 54%, but Capim Grosso is currently over the legal limit). When the mayor changes, so do all the school principals and almost anyone in public administration that the new mayor can remove. The mayor cannot remove employees that entered based on civil service examinations ("concursos públicos"). However, anecdotally I've heard of cases of the mayor or his allies influencing test scores to benefit the sons and daughters of their favored electorates, and any mayor will do what he can to limit the number of "concursados" as much as he can in order to free up political capital.

The prevalence of vote buying almost certainly gives it inertia as well - a do-gooder would have incredible difficulty to buck the system. If all his competitors are offering compensation for their votes, and the voters are demanding it, how can anyone trying to do otherwise compete?

This contrasts starkly with the case in the United States. Issues such as abortion, complete immaterial here, can go a long way towards deciding elections in the US. Rather than being practically obligated to switch positions frequently depending on the political winds as local politicians do here in Brazil (for a councilman to curry favor with a newly-installed mayor, for example), it is almost impossible for an American politician to change his or her mind without significant reputation damage, meaning that it is only done by turning the smokescreen on full-blast on the public, even if the the change of mind is prudent.

So what's worse, party affiliations (and thus voter intentions) that are decided by high school and never revoked regardless of the circumstances, or party affiliations that are signify nothing other than the pool of people that will get new jobs after the election? In either case, arguing the merit of politics is useless, since an American's mind can't change and a Bahian never really cared about the policy in the first place. So I guess it's a draw.