RIO DE JANEIRO, BRAZIL – Throughout the history of Brazil, as well as Latin America in general, dependence on commodities promoted countless opportunities for development. Choosing the easier path, that of populism, prevented this from happening. Now a new cycle is opening that door again.
It was in June 1981 that Paul Volcker, the chairman of the U.S. central bank, the Federal Reserve, marked his term at the head of the institution. The interest rates of the largest economy in the world reached an unbelievable 20%, in a rigor that sought to curb inflation once and for all.
This is a surreal number, particularly today when we see American interest rates fluctuating between 0 and 0.25% a year, but it was fitting for a moment that was also surreal.
After the Iranian revolution and the second oil shock, Americans were witnessing unprecedented inflation, of 14.3% in 12 months. To make matters worse, unemployment was also hitting record levels, putting an end to the widely-held belief at the time that a little more inflation would allow for more job creation and vice versa.
However, the harsh period the U.S. faced sounds like a respite from the consequences of this interest rate hike in Latin American economies.
If Volcker’s policy in the U.S. would reduce inflation to 3% by the end of his mandate, in Brazil it would lead the country to a crisis, with an 8.5% drop in GDP between 1980 and 1985.
In Brazil, the 1980s became known as “the lost decade.” Starting with Mexico, where the term was born, the countries in the region that had gone into massive debt during the 1970s found themselves trapped in dollar debt, with record interest rates and a slowing global economy.
Throughout the 20th century, Latin countries saw their ups and downs linked essentially to the direction of the world economy. In periods of growth, the region would see a boom in commodities (such as oil, soy, wheat, meat, and minerals), flooding the public coffers and the pockets of its citizens with dollars. Other times, such as the 1980s, the opposite occurred.
On countless occasions, periods of this type led to a belief that “at last, Latin American countries had found the formula for success.”
Latin America’s dependence on commodities has ensured certain moments that today could be regarded as fanciful. In the 1940s, for example, Argentina and Venezuela had the 6th and 4th highest per capita income in the world, respectively.
After the end of WWII, a wave of Spanish immigrants took over a thriving Venezuela, which saw the price of commodities such as oil rising due to Europe’s recovery.
Despite not having reached such high levels on a global scale, Brazil also experienced moments of euphoria. To date, the record for the most IPOs on the stock exchange is held by the commodities boom that preceded WW1, when 250 companies went public in a 6-year period.
However, there is a relevant factor to consider. Until the 1970s, Brazilian agriculture was mostly restricted to the south and southeast. The Midwest was not yet considered the breadbasket it is today, and oil production only reached considerable levels after 1997 with the end of monopoly, so the profits from these booms were mostly restricted to minerals, or some monoculture such as coffee.
Yet, three decades after the agricultural development of the Midwest, another super-cycle would follow, this time driven by China and its accession to the World Trade Organization (WTO).
The super-cycle that lasted from 2000 to 2014 is still very present in the memory of the country’s population. Its positive consequences, increasing the country’s growth, job creation, and flooding Brazil with dollars, delighted all social classes, as well as politicians, who, faced with the abundance did not spare any wondrous ideas on how to spend the money that entered the country through trade surpluses.
Credit exploded in the period, construction saw its greatest sales moment, as did the automobile industry and other consumer goods.
Not only did Brazil experience its first commodity boom after the green revolution, but after a brief period of reforms, culminating in an almost perfect combination.
By the end of the 1990s, Brazil had overcome its problem with high prices, created strict public debt control instruments, adopted a floating exchange rate and inflation targets.
Brazil went through the end of the Brazilian real’s parity with the dollar without losing control over prices, as happened in neighboring Argentina, which, along with the growth euphoria, saw its inflation rate reach 40% in 2010.
In fact, Brazil tried to promote distortions in inflation by restricting increases in fuel prices and issuing provisional measures to lower electricity bills.
The first caused a R$120 (US$22.5) billion loss to Petrobras, while the second led to a R$140 billion loss to the electricity sector. In good part, they are tied to the crisis experienced in 2014-2016, with an 8.1% drop in GDP.
In common with other times there is an important factor. Brazil made no institutional advances or reforms while the economy was doing well. When the climate allowed for a calm discussion of the next steps and prevent an economic meltdown once the prices of products sold came back to reality.
As a rule, Brazil only makes adjustments in moments of crisis. It always goes against the tide.
However, at this very moment Brazil may be back to the beginning of the cycle. In recent months, commodities such as iron ore, soybeans, and oil have been recovering as the economy has returned to normal with the advance of vaccination and the control of the pandemic.
The effects are now quite visible. In the first quarter of this year there was record job creation. It was 841,000 jobs in the first three months of the year, the second highest number since official records began.
The trade balance has also reacted well. The expectation is that at the end of the year, the country will have the largest trade surplus in history, closing the year at US$83 billion.
Unlike the last cycle, however, there are less solid causes at the moment. The world economy is growing less, despite higher growth in 2021 due to the depressed base in 2020.
The backdrop may help the country get its economy back on track more quickly compared to the pre-pandemic period.
But the time is not right to repeat what has always been done and abandon adjustments, reforms, and spending the extra money that the world is paying for Brazil’s products.
The country’s conjuncture is not easy at all, that demography is more fragile, with fewer and fewer workers and incipient productivity growth.
However, the cycle that ties Brazil to underdevelopment can be broken, albeit with difficulty, and focus on solving long-term issues in a moment of apparent bonanza.
It would be historic, but it is not an easy task.
The government has also posted record revenues. How can public servants be convinced that the administrative reform is a long-term need in this scenario? It will be up to Congress to take charge.
Likewise, Congress may be inspired by agriculture, the only sector whose productivity in the country is growing considerably.
In the last decade, soy production in Brazil had an average gain of 5.1% a year in productivity, which means more production in a smaller area, thus surfing on relevant gains.
The differentials in agriculture should be looked at today and applied to the rest of the economy.
There is much less complex taxation in this sector than in industry or services, lower capital costs, and greater access to state-of-the-art technology in the world.
Moreover, unlike Brazil’s industry, agriculture competes strongly with the rest of the planet, insofar as it produces commodities, i.e., common products.
An opening of trade also depends on the good will of Congress and its articulation.
In short, a new chance is available for Brazil. How it will be used is what will, once again, define the country’s fate.