quinta-feira, 3 de maio de 2012

The Literacy Impact

This post is just a first shot at something that I hope to consider in much more detail in the future - what exactly is the effect of illiteracy or functional illiteracy on the Brazilian population (or, at least the population close to where I live)?

First, some explanation of what one encounters in my neck of the woods, the dry interior of Bahia state:

-Most people, but not including many older adults, can be said to be technically "literate". They can write their names and can read simple sentences.
-Almost no one reads books as a source of amusement. Reading is almost universally considered a horrifying task forced upon you by schools (unless its the bible, in which case it's by the church). One never sees books in public spaces, and not too often in private ones either - almost no houses have a proud bookstand displaying their literature as I often see in the US. No one considers books necessary for transportation - take a two-day bus trip and you'll be the only one that brought a book.
 -Negative views of reading seem to approach superstition - reading after you eat can destroy your eyesight, for example. So can reading on the bus. Maybe there's a grain of truth to it, but certainly not in proportion to the concern it causes.
-No one, in the course of an argument or conversation, will ever refer to something they read to make their case. The ultimate source of authoritative knowledge is personal experience. Next is someone you personally know that said so. Third is television (and within television, it's a tough call whether the news or the soap operas are more likely to form opinion on a burning question such as "do foreigners bathe or not?").
-To a certain extent, reading is something you do if there is something wrong with you. In times of depression, if you don't reach for the bible, you probably read self-help books, the only type of literature that appears to be widely available.
-One makes written advertisements (like pamphlets) at his risk - even people that can read the information might find the effort too great to bother, and will chuck it in the street. In my experience trying to advertise a free community movie theater, most people did not achieve an understanding of what the advertisement said without some coaching (and it probably contained a total of 20 words).

I started to think about all this while reading a new book called "The Information", that briefly delves into a study on illiteracy in Central Asia in the 1930s. The researcher found that illiterate subjects could not or would not make "logical" arguments. The author gives the example of the syllogismish question:

All bears in the North are white.
City X is in the North.
What color are the bears in City X?

The literate observer will say "White". The illiterate respondent will say something like "I don't know. I've never been there. I've only seen black bears".

Now, this is quite a bit more extreme than anything I've seen here in Bahia, but it still seemed to get at a kernel of truth about why I find it so hard to relate to people here. "The Information" goes on to argue that the very thought processes of literate and illiterate individuals are quite different, and formal logic and argumentation are basically impossible without literacy.

Typically when a foreigner feels a disconnect in the country he's in, he's likely to simply attribute it to "cultural differences." But what if much of the culural difference he feels in a place like Bahia is in fact attributable to the difference in literacy levels? I don't know how big the impact is - I'm certain it exists, but I don't know if it's a lot or a little. But I'd consider the following observations as candidates for further exploration:
-Very few people in my experience, including college students, can grasp a complicated or nuanced argument, text-based or not. It's a tough task for anyone, but I'd guess that in more literate countries, there is at least a significant portion of the population that can generally understand what follows logically from a fact and what doesn't. I reckon that population to be very small where I live.*
-There is an astonishing inability to think creatively among most people. When I teach English from a textbook to groups, a good part of the exercises must simply be thrown out, because no more than one in five students can answer a question like "describe your ideal house" or do role playing. They sit silently hoping to avoid the question, or simply say "I don't know". If you give numerous examples, you can probably get them to choose the best example. But few students will come up with an original idea, and it's not because of language issues (I and others have observed creativity issues a thousand times).
-There is a penchant for believing in preposterous conspiracy theories that I think most literate people could discard after a moment's reflection.**

I hope I'm not coming down to hard on the people here. It's worth noting that any population, including that of the US, struggles with the challenges of logic, creativity, etc. And people everywhere love crazy conspiracy theories, and do not like to change their mind.

But even with that in mind, I still propose (as a hypothesis for further consideration, not as a fact) that low literacy rates play a major role in local culture and that, as a correlary, if and when serious functional literacy real takes hold in the region, the culture will undergo some significant changes. I have a lot more to say (and many more qualification to make, such as "what if it's not literacy per se, but rather a cultural factor that promotes literacy and other related factors at the same time that really counts? Say, and 'educational culture'?"), but more on this later after some research, se deus quiser.

*To give an example from a few days ago, an English student of mine (who is also a college student) had heard some information to the effect that many words related to capoeira come from African languages. She translated this into the contention that all words related to capoeira, including the word "capoeira", come from African languages. I had read a couple books about the subject and knew that the origins are pretty murky and disputed, so I tried to argue that, while its indisputable that many words used in capoeira (say "berimbau")are of African origin, that doesn't mean all are, and the word "capoeira" itself could be an African word, or a Brazilian word based on an African word, or purely a Brazilian word (the word "capoeira" also refers to a portable chicken cage, which may be related to its origins), but probably no one knows for sure. But she appeared to take my qualification as a wholesale rejection of her idea and merely replied by repeating a few times what she'd already said: "All those capoeira words are African words". The anecdote doesn't amount to much, but I feel it's fairly representative of what I find on the rare occassions where I leave "nice conversation mode" and move into "fact-parsing mode".
**An excellent example: a friend told me that he found out that the moon landing was a fraud. How did he know? Exhibit A: the astronaut had a shadow. Exhibit B: the astronaut was stuck to the floor (that is, he was feeling the effect of gravity rather than floating in space).

Now, dear reader, see if 5 seconds is enough to conclude that this is absurd. I'll wait.

As for A, you don't have to know much to see that, if you can see anything, there is light, and if there is light, there is a shadow. If the astronaut wasn't shrouded in absolute darkness (which he wasn't - we can see him in the video), then we know that he must have had a shadow. For B, most of us learned in school that anything that has mass has gravity, and the moon certainly has a lot of mass. So of course the astronaut is on the ground rather than floating. If I recall correctly, the moon has 1/6 the gravity of earth. But of course, my argument wasn't very convincing - he'd heard his ridiculous theory from a friend he admired, so logic wasn't likely to get in the way. My friend ended the conversation with "He had a bunch of other proofs too, I just can't remember them now".

domingo, 25 de março de 2012

More on Retirement in Brazil

Previously, I've written about retirement in Brazil. The Economist has a good article taking on the same subject:

http://www.economist.com/node/21551093

quinta-feira, 15 de março de 2012

Brazil's Challenges #2: The End of Easy Credit

Over the last decade, consumer credit has exploded in Brazil. The stabilization of the economy in the 1990's included a precipitous fall in inflation, which allowed consumers and firms to start thinking a bit more long-term: banks, companies and the government have been looking for ways to make up for lost time and lost consumption ever since. One result has been a huge rise in credit. This chart shows the absolute since 2002, taken from the Central Bank - the total 2002-2011 nominal growth was 438%.



The strong credit growth, which has been from 10% to 30% for every year shown here, has stirred plenty of debate about the health of Brazil's economy, especially in the middle of 2011. The blog brazilianbubble.com shares news daily to support its position that the Brazilian economy is headed for a disaster. Major publications like the Financial Times, the Wall Street Journal and BusinessWeek have questioned the ability of Brazilian consumers to manage this debt, and praised strong credit growth as an indicator of economic strength (and the blog beyondbrics refers to the debate here). The layman can be forgiven for not being certain what to conclude, and we can expect public opinion to keep changing by the month.

But whether a bubble is on its way to bursting or not, it is certainly the case that these scintillating growth rates in credit can't go on forever. As of 2010, the World Bank has credit at 57% of the Brazilian economy, about double what it was in 2002. Of course, this is far from outrageous, as the world average is over 100%. But for lower-middle income countries, Brazil is above average, and given new concerns about inflation eating into disposable income in the country, its questionable whether Brazilians can afford serious continued growth in the cost of paying down debt.

No one doubts that credit has played a crucial role in Brazil's recent economic success. Brazil's leaders have defined their strategy as appealing to the "internal market" and developing consumption as an alternative to export-led growth. Consumption has become so crucial as an economic and political tool that a Brazilian political scientist has even attributed voting patterns to which candidate allows them to increase consumption the most. Almost everything, from a semester of English classes to a new stereo is paid in monthly installments - to the point where the displayed price is almost never what you pay up front. Consumers that don't want to pay interest rates (though most Brazilian consumers have falling for the trick of presenting up-front payment as a "discount" rather than avoiding interest) have to ask for the price "a vista". Consumption and credit are fully intertwined in the Brazilian economy.

Though credit growth is slowing, it should still continue to be significant. The Brazilian Central Bank expects growth of 15% in 2012, down from 18% in 2011. In the mid to long-term, responsible credit growth will only become more difficult as the market saturates.

What will replace credit as a major driver of economic growth in Brazil? It's possible that a coming oil economy will step in to fill the gap, or that the country will finally turn to real productivity gains down the line. But we should expect the low-hanging fruit credit has provided for the last decade to be exhausted soon enough, and a more arduous growth strategy based on investment and productivity to be necessary.

quarta-feira, 14 de março de 2012

Brazilian youth and the civil service exam

Globo's Jornal Nacional ran a positive story yesterday about people that made their dreams come true by passing in Brazilian civil service examinations. These are typically people that studied hard, graduated from college (or even two colleges) and even quit their jobs to spend a whole year studying for exams. Many took 6 or even a dozen exams, in as many states, before they finally finished in the top spot.

Civil service exams are a mania in Brazil. In small towns with no major company presence, civil service exams often seem the only real ticket to a high salary, doing something like working in a state-run bank or pushing papers in the social security office. Corruption is high, and Brazilian law accordingly requires the tests as a way to ensure that the candidate will be picked for merit. The interviewees on the news yesterday had acheived their "dreams" with government jobs such as financial auditors of government programs, or as judges or other public law officials.

Then came the salaries these people make. One auditor makes R$12,000 per month, 10 times Brazil's GDP per capita, and is about equivalent to what I or my wife can hope to make in an entire year as teachers. The girl that won the job (after taking six or eight tests) is 24 years old, and probably has done nothing in life beyond get her diploma and study for tests. A certain judge was earning a government salary of R$50,000 per month (yes, per month, not year), a sum similar to the earnings of the US President.

So in a year where minimum-wage earning police officers are fighting for raises, and on a day where the national teachers union is enacting a "paralization" (where they don't teach for a couple days, but without any demands - apparently just a quick flexing of the muscles) to bring attention to their low pay, why does Brazil shower preposterous salaries on officials like auditors? Obviously they should be high-quality employees, to avoid corruption. But these prices are many multiples of what similar people can probably expect in the private sector. And I doubt that coming in first place on an exam of minutia is a good indicator of high productivity at the work place. And given Brazil's labor laws, it's a good bet that almost no one hired by civil service examination will ever be fired if they don't do their job well.

Finally, there's the distortion of incentives. Brazil's best and brightest are dedicating years of their lives to study for tests to become highly-paid paper pushers, in guaranteed jobs where they have no incentive to perform well. Imagine all the better ways Brazil's tax dollars could be spent. And the productive things these apparently intelligent people might do with their time, if the government wasn't dangling obscene salaries in front of them.

Interestingly, Globo went on to interview students at a science fair in São Paulo, where they were hawking inventions such as an electricity-generating rocking chair, a cheap alternative to currently-used prosthetic feet, and a glove that translates sign language to spoken Portuguese, among others. I thought it was a pretty incredible show given the youth of he student participants. The report wasn't meant to contrast with the paper-pushing all stars interviewed before it, but when a student being interviewed said something like "it probably won't make any money, but I think it can help a lot of people", it made the segment on civil service examinations look even more pathetic.

I hope the day comes where the Brazilian dream is no longer passing the civil service examination to become a beaurocrat. Braziilan youth can do better.

sexta-feira, 9 de março de 2012

FT on the Brazil's low growth

Now that Brazilian growth is entering a second year of low growth, the Financial Times claims that "carnival is over" for the country, which has grown 2,7% over the last year, following 7,5% growth back in 2010. Much of the cause of the problem, the editorial admits, is external - Europe's problems are grave, and together with the strong real, prospects are bad for exports this year. Yet the solutions proposed are all internal, basically reduced to "cut spending to reduce inflation".

The article makes writing editorials for the FT look pretty easy - it seems satisfied with citing a few well-known known facts about the country's economy, tying them together, throwing in a carnaval reference, and calling it a day. Some of the logic is also unclear to me, such as the need to cut welfare to reduce the custo Brasil. The major welfare program, Bolsa Familia, accounts for only 0.4% of the economy, and dozens of studies have it causing significant economic growth, making it a strange place for the FT to recommend taking the axe.

Welfare aside, the article tells Brazil what it already knows (or at least has been hearing for years), and probably isn't willing to do. Even if one really believes that the time to cut spending (rather than focusing on spending better) is now, will Brazil cut spending in a (non-federal) election year marked by an economic slowdown? Nope! I expect the government to prioritize credit and consumption growth, which has been a crucial ingredient in political success for the last decade. This FT editorial is falling on deaf ears.

segunda-feira, 5 de março de 2012

Tough job

I occasionally use this blog to say various negative things about Brazilian education. It’s worth taking a minute to look at the reality some teachers face in the classroom while trying to educate deeply underprivileged children.

João is a six-year-old who studies in a public school in the center of a small city in the interior of Bahia. His teacher has already taught some of his numerous older brothers and sisters and has a good idea about his difficult family situation. His family can’t afford to buy new clothes, and few days ago he showed up at school in pants so tight that he couldn’t zip them up. Every time he came back to the bathroom, class had to be stopped so the teacher could help him out. He often has no breakfast to eat before he goes to school. While he’s there, he’s unable to pay attention and spends a good portion of his time yawning loudly to get the teacher to look at him. When the teacher asks him if he knows why he shouldn’t engage in certain proscribed behaviors, he gives a well-rehearsed answer that he learned at home: “Because God’ll punish me.” When the teacher asks him why he needs to get a good education, the answer is equally practiced: “They’ll take away our welfare (Bolsa Família)”.

Recently, he showed up at school bursting with pride because he’d done homework for the first time. But when the teacher looked, he’d only written his name on it, and left the rest of the sheet blank. When the teacher asked why, he explained, “My mom didn’t know how to help me.” The activity had been to write the first letter before each word, along the lines of putting the “A” before “pple”.

It’s tough to imagine that a teacher, no matter how good, would be able to help him keep up with his better-off cohort, fully equipped as it is with breakfasts and literate moms. Long before children set foot in their very first classroom, a crucial part of the difference between private and public education in Brazil has already been put in place.

FHC interview in The Economist

For those that learn about Brazil reading books from the US or the UK (say, The Forgotten Continent by The Economist's Michael Reid, or the duo of books from 2010, The New Brazil and Brazil on the Rise, reviewed elsewhere in this blog), former president Fernando Henrique Cardoso typically comes off quite well. Before entering the presidency, he was the man that solved Brazil's inflation problems. While in office, he made some reforms that have turned out well by some measures, like the privatization of state-run companies has turned tax dollar-draining duds into global powerhouses (including Vale and Embraer). He also started several social programs (that have since been rebranded by his competitors) and got the ball rolling to try to improve Brazil's dismal public education. He spent years abroad after becoming a persona non grata for opposing the dictatorship, and is an accomplished academic with a PhD in sociology.

He had some faults too - there was undoubtedly some level of corruption in his privatizations, and his second term in office was unsuccessful (though perhaps this can be attributed to a lack of sufficient corruption - he didn't buy off congress to support his agenda).

In Brazil itself, evaluations of the former president are far from universally positive. In Bahia, a stronghold of his opponents in the Workers Party, he is detested by a large part of the population, often irrationally so; my wife refuses to use academic books with his name on them, even if they'd be useful for a college paper. As far as I can tell, the chasm between the international view of FCH comes down to two important points that separate Brazil from the US and UK - identity politics as practiced in Brazil, and a culture of training people to use the word "neoliberal" a lot, and with great disdain, about people that try to reform Brazil's bloated government.

In the case of identity politics, Brazilians consider FHC to be arrogant and out of touch with common people. He may well have a fantastic ego, and his professorial demeanor can be offputting to some. Like any politician that wants to survive, he spins things to be favorable to him, and wants to convince the world that his contribution was important. On the other hand, he is probably just as often the victim of spin against him. He once argued that a serious problem in education was the fact that teachers are the lowest-level professionals - that is, that teachers are typically people that can't get a better job. He's completely right, but the statement was turned into an attack on teachers by his opponents, who spun the statement to mean that teachers are a bunch of lazy bums. To this day, he is dispised by a large contingent of Brazilian teachers (explaining the misunderstanding of his statement does nothing to alleviate the hatred).

Personally, I don't care very much for identity politics. As for the charge that FHC gave the country away to foreigners, Brazil is profiting still from changes he and others brought about (but most people are attributing economic growth to Lula instead). So, though I try to maintain a healthy skepticism, and by default consider any Brazilian politician corrupt, I tend to more or less see FHC as the international press does.

Take a look at the current interview with him in the Economist - it's mostly politics with only a bit of information about Brazil's economic development (regarding economic development, the most interesting part is perhaps some quick mentions of the rising middle class in Brazil and how it is more market-oriented and less dependent on government, which might herald changes further down the road). But he comes off as a pretty reasonable guy. He takes credit for Brazil's recent success (such as when he mentions that everyone was afraid of Lula undoing all the progress "he" had made), but he is also anxious for new leaders to step in. He admits to mistakes. He might criticize Lula and other opponents, but he does so reservedly and rationally.

Contrast this with Lula's interview in the New Yorker some months ago (which I summarized in another entry), in which Lula spends the entire time insisting that black is white - his bungles are actually the pride of others, inventions of others never existed, everything before him was doomed to failure.

You probably shouldn't draw too many conclusions about real presidential performance based on their interviews, but then again, if so many people love Lula and hate FHC becase of their personality differences, why can't you make an equally superficial judgement?

domingo, 26 de fevereiro de 2012

Anthropology of Pilar

Having conducted a thorough anthropological survey of the mining town Pilar, a district of the municipality of Jsguarari, I am in a position to reveal the following results:



-If you park your car in the shade of a tree, you risk a goat climbing onto your roof to eat the tree leaves. This can scratch your car.

-All those donkeys that appear to not belong to anyone actually don't belong to anyone. They wander around, graze on the meager caatinga grass, and occassionally pose danger to unaware motorists. They're fun to point out to children, especially when a baby donkey is following its mother around. But as beasts of burden, their value is now so low that people seem to just let them loose. Pilar has decent salaries for the region and is very isolated, so the automobile has taken over.

-Pilar was a company town built from scratch in the 1980s. The designers built the houses with one window in the front for peons, two windows for engineers, and four windows for managers. I'm not sure it would have been more expensive to make the peon houses slightly wider and less deep, allowing for more windows but a similar house size overall. But in any case, to this day if you tell someone you have a new house in pilar, they will immediately ask how many windows it has - since the models are almost all the same, this tells them everything they need to know about the house, except how you've decorated it.

-Miners suffer a lot, what with spending all day underground and risking their lives in case of collapse, but the ones performing the most difficult and dangerous tasks can retire after 15 year of service. Yes, 15 years! Since most rank and file miners don't go to college, they start pretty young. One I know is on pace to retire at age 35, at which point he can go back to school while earning a full pension and, if god wills it, pursue a musical career. Doesn't seem like such a bad deal. Someday I'll try to visit a real working mine to experience how awful it is and get a sense of whether it's really worth it or not.

There's a lot more interesting things to say about Pilar, but I doubt I'll ever get around to them.

sexta-feira, 17 de fevereiro de 2012

Trade zig-zag

For those who favor more open trade (like Dr. John Welch - see Brazil Under Dilma Taskforce Report below), Brazil took a giant step back when it implemented a 30% tax increase on imported vehicles at the end of 2011. The measure was a cheap response to the strengthening real, which threatened local manufacturing as more people began to spring for better imported cars. Locally manufactured cars are fantastically expensive in Brazil, at over twice the price of the same car in any country that doesn't tax the bejebus out of manufactured goods.

Now, the government has taken a small step forward again by announcing a partial repeal, according to Bloomberg. After complaints, especially from Chinese manufacturers, the Brazilian government is now reducing taxes for foreign companies that are planning investment in local manufacturing in Brazil, and claiming a victory for having provided a srong incentive for foreign investment.

On the other hand, taxes, rather than improvements in productivity, are still the go-to tool to deal with competition problems. The deeper issue of a horrible tax regime, which is regressive and provides poor incentives, is also unlikely to receive the treatment it deserves in the near future.

quinta-feira, 16 de fevereiro de 2012

The Brazilian CEO's dream

An interesting survey of over five thousand executives seems to show a particular aspect of Brazilian business culture. According to business magazine Exame, the dream destination of Brazilian executives is Brazil's state-run petroleum giant Petrobrás. While the company is legendary for its investment in training and opportunities for advancement (all well as government benefits), the downside is serious as well - the link between performance and remuneration is a bit weak. Employees that perform well can't look forward to bonuses. On the other hand, lazy employees are unlikely to get fired, and the magazine reports that Petrobras cut only 0.05% of its workforce in 2011.

The article concludes that Brazilian workers, or at least those over 25, seem to prefer stabiity and to guard against potential losses, rather than maximize potential financial gain or working in an environment that value efficiency. A friend of mine who is captain of a petroleum ship has given me an idea of the kind of inefficiency to be expected; lack of respect for oil delivery schedules (apparently fatal in the oil industry), a willingness to send boats out without ensuring they'll have something on board for the return trip (wasted trips deal a severe blow to profit margins) and a lack of planning that leaves him without ever knowing, or being able to tell his family, whether he'll be back for the holidays or not.

Will todays 25-year-olds change their mind as they age and become responsible for families, or do they represent a generational difference that heralds more appetite for risk in the future? Check back in ten years for the answer.

terça-feira, 14 de fevereiro de 2012

Brazil rates worst for public expenditures

A couple weeks ago, an organization called the Brazilian Institution for Tax Planning (IBPT) released the results of its 30-country survey, which measured the return that citizens get for the money they are taxed. Brazil, as you may know, has an impressively high tax rate for a developing country at 34.4%, significantly higher than that of the US and the highest in the Americas. For that reason, and also because the group is probably an anti-tax group of some sort (no time to look it up now!), it should be no surprise that Brazil came in dead last. The survey included neighbors Argentina and Uruguay. Notably, it doesn't seem to include too many other low-income countries, which I take as a sign that this is an anti-tax group that wanted the data to show Brazil in last place. Be that as it may, it is still an effectively dramatic way of highlighting Brazil's inefficiency.

The same story repeats itself in microcosm when you look into specific areas of public services in Brazil. You can fill in the blank in the sentence below with almost anything (education, health, security):

Brazil lags in ________, despite the fact that it spends more as a percentage of GDP than comparable developing countries.

As a result, Brazilians pay either one time (taxes) and get a bad deal, or if they have a high enough income, they pay a second time to buy private education, health and security that actual works.

Though there are no shortage of academics and newspapers and other organizations that insist that the time to change these policies and make them fairer is now, the typical Brazilian on the street isn't likely to protest over these issues. Taxes are often hidden, especially in the prices of manufactured goods, which may be part of the reason that organizations have to work so hard to get the issue of taxes and inefficiency in the news (especially comparing with the United States, which, despite being rated as very efficient, has to content with a large swath of the population that thinks that any tax at all is akin to tyranny, no matter how well spent).

In a lame reply on Globo News, the government argued that the results didn't take into account the effect of social spending like Bolsa Familia.

You can find some more interesting information from IBPT here.

sexta-feira, 10 de fevereiro de 2012

The Brazil Under Dilma Taskforce report

John H. Welch, an economist and economic strategist with an impressive résumé for his work in and regarding Brazil, has written an interesting report just released, avaliable here. The idea of the report is to dig into Brazil's economic situation and determine whether, after one year in office, President Dilma will be likely to reform the economy, leave it be, or take it back in time to the "failed policies of the 1970's".

Key takeaways:
-In Welch's view, the current Brazilian administration's view of inflation is wrong. Currently the finance minister insists that rising inflation is the result of supply shocks, that will work themselves out as supply expands without monetary intervention. However, Welch purports to show (or perhaps does show - not being an economist I can't really say how right he is) that it is in fact demand-driven, implying that the failure to raise interests rates could result in a continuation of the internal consumption boom and thus worsening inflation.

-The author also pans the 2011 decision to raise taxes on imported cars as a response to the rising value of the real (and thus the falling price of imports in reais), rather than addressing underlying competitivity problems. The same goes for Brazil's newfound habit of accusing China of dumping. For Welch, the opening of trade since the 1990s has been so important to Brazil's recent success that these recent anti-trade positions threaten to scupper the country's gains. He calls for more privatization of the economy as well.

-Finally, government spending falls under his sites - though Dilma has made some attempts to reign in Brazil's ever-increasing budget, it seems it won't be enough for the country to maintain a budget surplus and invest in infrastucture if more aggressive action isn't taken. Welch calls for social security reform (passed under Lula in 2003 but never implemented - and also which I wrote about in a bit more detail recently), but also supports Dilma's attempts to suppress increases in the minimum wage. On the other, savings and investment are simply too low to support solid growth in the future. After some economic wizardry, Welch contends that Brazil is not likely to manage its goal of a 4.5% GDP growth rate in the coming years.

After some positive and negative points, the reader gets the impression that more of the same can be expected. Brazil will grow, but won't risk serious reform to really meet its potential.

quarta-feira, 8 de fevereiro de 2012

Brazil's Challenges #1: Aging and Retirement

To all you readers out there - that is to say, my future self:

This entry is the first in a short series of summaries of economic challenges that Brazil will face in the coming years. Though Brazil expects to become a developed nation on the strength of agricultural and oil exports sometime in the coming decades, there will be onstacles and difficult decisions along the way. First up: the population pyramid and retirement benefits.

First, when reading about the Brazilian economy, you may often find references to Brazil's relatively young population listed as an important asset underpinning growth potential. This claim should come with a very important "however": the population may be young, but it is aging, and fast. In the 1960s, Brazil was home to severe demographic turnaround, when a large portion of the Brazilian population decided, all at once, that two was a pretty good number of children to have. It's been speculated that the mass decision was brought about by representations of family on TV, among other theories (those interested can take a look at this National Geographic article). Whatever the case, the implications for the coming decades are pretty stark. According to IBGE census data and projections, from 2008 to 2050, it's estimate that the number of children up to 14 years old in Brazil will fall by half, and the number of elderly 65 and over will almost quadruple. Here go the numbers, which I took from an article called A agenda fiscal by the economist Antonio Delfim Netto, so I wouldn't have to crunch them myself:



Sometime in the 2030s, then, the population of 0-14 year olds will be smaller than the geriatric population in Brazil. Actually, that specific measure compares favorably with the United States, where the change should occur prior to 2030, according to census statistics. But here's a measure in which Brazil does not compare favorably - from 2008 to 2050, the population age 65 and over will go from less than 7% of the total in Brazil to 23%. In the case of the United states, the same population is projected to go from 13% in the United states in 2010 to 20% in 2030, but it will remain more or less in place through 2050, reaching that year with a smaller population 65+ than Brazil. The aging of the population thus appears to be sharper and deeper in Brazil, meaning that the "sweet spot" the country is currently in, with a small non-working age population, is going to be relatively short. And the country will almost certainly be (even) less prepared for its coming transition.

Now, social security in the United States is a thorny subject. Most serious people would say that it's unsustainable in its current form. But it also isn't impossible to find real economists that would say that the problem isn't that drastic - that if we were able to solve some other problems like health care costs, the US could support most of social security without going broke. I don't pretend to know either way. What I am pretty sure of, however, is that there isn't much debate among economists in Brazil.

I first noticed that something seemed iffy about Brazil's retirement policies a couple years ago, when my then-girlfriend complained that, if retirement policy hadn't been changed, she would have been able to retire on full salary after 25 years of work as a public school teacher, at age 45. Yes, 45. It is truly a country that doesn't think ahead that is willing to give a public employee one year of full pay to do nothing for every year she worked (I'm assuming a life expectancy of around 70 years in this case). I think it's a reasonable guess that a 45-year-old teacher is more or less at the peak of her career - she dominates her classroom material, knows how to discipline students and can give class with her eyes closed. She's efficient and productive. So let's pay her to go home and watch TV all day (or alteratively, sit in her doorway and watch people walk by all day).

Even worse is the fact that this case isn't particularly extreme. Even with recent retirement reforms, the number of years Brazilians must work has increased to 35 years for men and 30 years for women. But this is still without a minimum age (unless you haven't contributed to social security - that is, worked irregularly or not at all), which means that the average age of requests is currently 54 years for men and 52 years for women.

One way this impacts the country is cultural. The Brazilian population, in my personal experience, seems to have become fairly spoiled, with 50-year-olds already starting to curse the government (or their employers) for their tight-fistedness, while woeing their lot for still having to labor at such a ripe old age. Their German counterparts will be active in the labor market for another 17 years.
Furthermore, though other factors can be considered causes for this (for example, Brazil's history of inflation), very few people seem to save for retirement in Brazil. This is also possibly an effect of the region I live in, but my impression is that dependence on the government for retirement income is almost absolute.

More darkly, Brazil spends a preposterous sum on paying out current retirees. The current figure is about 12%, according to Brazil's Institute for Applied Economics Research (IPEA). This measure put Brazil in 14th place out of 131, countries studied, in line with the world's most developed countries. But Brazil isn't a developed country, and won't be for some time; and the aging of the population has only just begun.

Serious reforms will be necessary, since even under a situation of moderate reform, by 2050 social security would end up eating 22% of GDP (and in a situation without any reform, the figure is estimated at something like 35-40% of GDP). Certainly, reform will happen sooner or later. But at the moment, later is looking like the most likely option as current strikes and strike threats seem to indicate that it will be a serious challenge for Dilma to limit government spending in any fashion. The government has won big with expansions in welfare in the last decade as well, making more spending a winning proposition. With major sporting events coming up and investments in infrastructure necessary, one can only imagine that social security reform is not high on the agenda.

But there is also another reason to worry about Brazil's extravagant spending on pensions - it's not fair. Public sector employees are blessed with easy retirement at high wages, while the poor, which overwhelmingly work informal jobs, can only hope for minimum wage when they reach retirement age. This means that enormous amounts of government money (to a large extent levied regressively on hidden production taxes, so households pay through higher prices) are being funneled to Brazil's most comfortable citizens.

Over the next years, Brazil will need to tackle the challenge head-on, or it will only get uglier.

Most Exciting Market?

Two articles in Bloomberg give somewhat opposing views of Brazil today. One quotes Tempelton fund manager Mark Mobius describing Brazil as "one of the world's most exciting markets", and the article cites recent activity such as interest rate cuts in response to the European crisis, as well as the relatively weak Brazilian real, which has boosted industrial production, to justify the excitement. Interestingly, these are temporary effects - the real could well strengthen again after the global crisis matures, and interest rates still need to take inflation targets into account - yet Mr. Mobius seems to favor Brazil for it's long-term potential.

On the other hand, Bloomberg also released the results of its first-ever ranking of the "most promising" emerging markets, which ranks countries by projections 2012-16 GDP growth, inflation and government debt, while also taking into account exchange rate volatility, the price/earnings ratio of its stock market, and the ease of doing business. Brazil's place on the list? Number 16, which incidentally is one spot too low for it to appear in the available database, which lists only the top 15 countries. Brazil lags behind not only India and China and a number of other Asian countries, but also a good portion of Latin America, including Peru, Chile, Colombia and Mexico.

It's not difficult to imagine what tripped Brazil up, despite its absence from the list. Inflation is under control but still significant, and while growth was strong in 2010, the European crisis provoked a considerable slowdown in growth last year, and estimates for 2012 growth are similarly mediocre at 3.3%. The exchange rate is also a constant worry since the advent of the crisis in 2008, with a strengthening real constantly threatening the country's exports. And of course, the country regularly gets massacred in rankings of ease of doing business.

I have no idea about the price to earnings ratio of the Bovespa, but a quick look around Google seems to indicate that it hovers around 13, which would make it about average for the top 15 emerging markets group. And the goodish news? Government date is currently low! Though that could change soon, as President Dilma tries to balance worker demands and strike threats with the budget cuts smaller than what economists are calling for.

The verdict? I'd say Brazil at number 16 sounds about right. It may have good long-term potential, but a lot of countries are in even better positions right now.

terça-feira, 7 de fevereiro de 2012

Police Strike in Bahia

The state of Bahia, where I live, is currently in the midst of a police strike. The event has huge coverage in the news and reports of fantastic violence have come out of the Salvador area, where spikes in murder rates and other crimes were reported in the early days of the strike, more than doubling according to the AP. According to the same article and television news, soldiers brought in by the state government have surrounded a building occuppied by what they describe as rogue police officers, who the governor claims have promoted vandalism and violence during the strike.

Certainly, it's believable that the police are behind at least some of the surge in violence in Bahia. As they strike against low pay, offices are simultaneously desperate to convince the population of how necessary they are. And some of the crimes reported in Salvador are certainly suspicious. For example, Globo's news program last night reported the hijacking of a school bus - the criminal stopped the bus, ordered the driver and all the children off, drove it away and burnt the bus to a crispy black shell. Notably, he didn't steal anything. Why committ such an absurd crime? That a police officer's friend was hired to scare some children and increase the demand for security seems a lot more plausible than the theory that reduced security has allowed school-bus arsonists to run rampant.

Here in small Senhor do Bonfim, there is also a general feeling of unease without police protection, though it is nothing like in Salvador. There have been some reports of minor vandalism, but the same suspicions remain about police involvement. In any case, how effective are the police really in preventing crime here? How many would-be robbers are really deterred by a minor police presence when they aren't on strike? I'm not sure, but my personal experience is that the situation is extremely different from the United States. No one stands ready to call the equivalent of 911 and expects a speedy police response in a dangerous situation. Police might investigate crimes after the fact, and they might murder drug dealers on occassion, but do the intervene in petty crime? Not that I've ever seen personally around here.

Whatever the real role of the police in Brazilian society, the current situation is certainly bad for Brazil's development. The United States has warned tourists against visiting Brazil, and the Bahian tourism association claims that the strike has reduced the tourism take by 10%, and bars and restaurants have been hit hard as citizens become loathe to leave their homes. They say that uncoming Carnaval won't be affected, but the situation still remains ugly. Here's hoping that Carnaval will be canceled so we can see what happens in such an extreme situation!