Brazil feature


When Luiz Inácio Lula da Silva (popularly known as Lula) was elected Brazil’s 35th president in 2003, the economy had been stagnating for many years. Since the 1970s, Brazil had been crippled by foreign debt which appeared impossible to pay back and the burden of which resulted in two decades of lost economic growth. By the time Lula took office, macroeconomic fundamentals had been weak for two generations. As Lula describes it, the world’s eighth-largest economy was, “A capitalist economy without capital and without credit supply.”2


Transformation of the economy Lula’s policies transformed Brazil’s fortunes from a situation in which hope related only to the timing of the next IMF loan. Today, after a successful return to economic growth up until 2008 and with an increase in foreign trade flows from US$100 billion to US$400 billion in the last eight years, there is now great confidence and optimism among Brazilians as they look forward to hosting the 2014 FIFA World Cup, the 2016 Summer Olympics; plans to build two million new houses; investment programs of US$262 billion to 2015 and US$224 billion investment for Petrobras (Brazil’s biggest energy company).


And of Latin America Before looking at how the Brazilian economy was transformed in under a decade, we briefly consider the whole region. Latin America today is less poor and more democratic than much of Asia. Social transformation throughout the region, combined with a remarkable surge in economic wealth (average reserves over the last decade, have doubled as a percentage of GDP) have resulted in Latin America no longer representing a problem to the world economy. Ironically, helped by high commodity prices and economies growing at three-to-four times the rate of developed market economies – many of whose economic numbers currently look like those for Latin America in the 1980s –


“Lulisma1 is now the most influential political


approach in Latin America.” Mike Reid, Americas Editor, The Economist


Latin America could well provide part of the solution to the current economic woes of developed economies.


Lulisma Lula’s election pledge was to break the economic dogmas that had suffocated the Brazilian economy for many years. The domestic market was strengthened with policies that put money into the hands of the poor and raised them into the consumer classes, helped by a fall in prices through increased competition. Manufacturing industry was developed along with social programs and trade surged. Thirty nine million Brazilians were raised from poverty into the middle classes during Lula’s term of office. As Charles Tang, Chairman of the Brazil-China Chamber of Commerce and Industry, describes it, having been a country with the socio-economic configuration of a broadly-based pyramid, Lula converted it into a diamond shape, with more middle-class than poor people. In Lula’s own words, “What makes the economy move is the capacity of people to buy and shop (for) the goods that are being produced in that country. Other than that, you can be a great exporter…”3 Lula’s belief is that macroeconomic policies can only succeed if microeconomics are successful. An example is his initially controversial ‘Electricity for all’ program to take electricity to the three million households, without electricity, in the most remote parts of Brazil. Not only were their homes electrified at no cost to them but the program also created 341,000 new jobs. Moreover, it helped the entire economy as 80% of the newly-electrified households purchased television sets and nearly 80% acquired refrigerators and other electrical appliances. To Lula, more consumers meant more employment, better salaries and a way out for all as two-thirds of Brazil’s


population became consumers and all elements of the population benefited from rising prosperity.


Brazil and China By fortunate coincidence, changes in Brazil coincided with changes in China. Lula astutely developed Brazil’s commercial relationships and, consequently, the country has been a major beneficiary of China’s growth. Chinese export earnings enabled Brazil to pay off all its foreign debt. As the U.S. has become a less important investor in Latin America generally, so China has filled the gap and, within five years, China is forecast to be the biggest investor into Latin America. For Brazil, China has the advantage of


being a trading partner and investor that is geographically remote and has a pragmatic nature, rather than one that is nearby and prescriptive. With China deficient in five million barrels of oil per day, prospects for Brazil’s oil finds look good, as does the outlook for Brazil’s mineral resources. Moreover, with over a billion people lacking in adequate provisions for food in the world, Brazil’s importance as a breadbasket to the world seems assured.


Mr. Robinson is the head of Brazilian equities and a director of Aberdeen’s operations in São Paulo, Brazil. He joined Aberdeen in 2000 and spent eight years on the North American Equities desk, including three years based in Aberdeen's US offices. In 2008 he returned to London to join the global emerging markets equities team. Mr. Robinson relocated to São Paulo in 2009. He graduated with an MA in Chemistry from Lincoln College, Oxford and is a CFA Charterholder. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.


1 Policies of Luiz Inácio Lula da Silva, Brazilian President, 2003-2010 2 This article reports on proceedings of The Economist High-Growth Markets Summit, in particular, speeches by the former President of Brazil, Luiz Inácio Lula da Silva and the session, ‘What’s Next for Latin America?’ 3 All comments/quotes from Luiz Inácio Lula da Silva taken from his keynote address, ‘The necessity and inevitability for global economic change’, The Economist ‘High-Growth Markets Summit’, London, October 2011. Aberdeen Asset Management was a sponsor of the Economist Summit.


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