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.

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.

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.

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.

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.

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.

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!