june 29 2010

The New Brazil

Lula: the future

The Brazilian president on the reinvention of a nation

Difficult path
Martin Wolf: the economy is stable but lacks dynamism

Energy boom
How oil and gas reserves are underpinning growth

w w w . f t . c o m /n e w b r a z i l

the new brazil | contents

Towards greatness
hAt is the new brazil? partly it is a story about economics: 10m more people became middle class between 2004 and 2008; the economy could grow by as much as 8 per cent this year; and the countrys foreign currency reserves stood at $235bn in February this year. And, in a particularly dramatic coup de thtre that demonstrates just how far the country has come from the debt default days of 2001, brazil recently lent $14bn to the international Monetary Fund. its reversal of fortunes could not be starker but problems remain, of course. While brazil is thriving, it is a developing nation. infrastructure needs building; crime rates have to come down. yet the other part of the story is about optimism, engendered mainly by the popular president Luiz incio Lula da silva, that the time has come for brazil to take its place once more on the world stage. hugo greenhalgh Editor

4 8

introduction

brazil is coming of age

coMMent

president Luiz igncio Lula da silva on brazils achievements

11 coMMent

the economy still lacks dynamism, writes Martin Wolf

12 16 politics

the frontrunners for president

econoMy

brazil enjoys little debt and plentiful growth

20 agriculture

how the state of bahia became a global agricultural powerhouse

24 28 photo essay

contributors eD crooKs is the Fts energy correspondent FioNA hArVey is the Fts environment correspondent LUiZ igNcio LULA DA siLVA is the president of brazil JohN pAUL rAthboNe is the Fts Latin America editor JohN reeD is the Fts motor industry correspondent JoNAthAN WheAtLey is the Fts brazil correspondent MArtiN WoLF is the Fts chief economics commentator special reports editor Michael skapinker editor hugo greenhalgh lead editor siona Jenkins senior editors robert orr, paul solman sub-editor christina Madden art director sheila Jack Visual consultant ed robinson Production editor riaan Wolmarans Global head of strategic sales Jon slade Head of digital advertising solutions Alastair Mackie Head of integrated solutions patrick collins senior campaign manager rachel harris advertising John Moncure
Financial times | 3

A spirit of optimism has returned

profiles

Five men who can each claim his part in the rise of brazil
32 energy

36

environMent

the country is determined to halt the death of its rainforests

40 44 infrastructure

A fitting symbol for a new era

auto industry

Manufacturing sets new records

photos: corbis; getty

oil and gas discoveries have boosted a nations economic clout

THE NEW brazil | iNTroducTioN

Megacity: So Paulo stretches into the distance

photo: Corbis

Coming of age
Brazil sees itself as destined for greatness because of its new-found political and economic stability. But it still has challenges to overcome, writes John Paul Rathbone

they had grown fat and clumsy. instead f the rise of brazil was of pushing him around, they even cast as a childhood story rather seemed to look up to him. standing in than a dry economics tract, the school yard, blinking in the sun, the fable might go something the boy revelled in his new status. like this. would it last? he wanted to make once upon a time, there was a sure it would. skinny boy who was bullied at school. the skinny boy is, of course, brazil. every time there was a fight in the his bullies are the playground, he financial markets of seemed to end up as developed economies, the punchbag. the the new games are the boy rarely comBrazil is a slightly soothing palliative of plained, even though gangly adolescent, the noughties credit his sorry state did not standing tall boom, and the latest match the glorious school-ground fight fate about which he amid the world is the global financial often daydreamed. crisis. his stepmother that just seemed to be community is China, the special the way things were. soup he ate the commodity boom that one day, a new teacher arrived, has boosted brazils economy, and his bringing with him some new games for exercises represent the macroeconomic the classroom. these playthings disstabilisation policies brazil put in tracted the big boys, and the fighting place in the mid-1990s. the result, in stopped. the skinny boy used the calm this simple tale first told by brazilian to do exercises, recommended by his commentator ricardo amorim, is the canny stepmother, who also fed him a new brazil: a slightly gangly adolesspecial soup to make him strong. cent, standing tall amid the world all good things come to end, howcommunity, not fully grown into its ever. the games broke, as they always new stature but confident and eager to do, and tempers flared again in the make its mark. playground. this time, however, the ever since its separation from big boys no longer bullied the skinny portugal and the establishment of an boy. he had become lean and fit, while
Financial times | 5

THE NEW brazil | iNTroducTioN

independent empire in 1822, brazil has viewed itself as destined for greatness. sometimes, the outside world has reinforced this view. Dozens of books published over the past two centuries have recognised brazils potential, most famously stefan zweigs Brazil: Land of the Future. the country is destined undoubtedly to play one of the most important parts in the future development of our world, zweig wrote in 1941 shortly after arriving in the country, fleeing war-torn europe. and yet for much of its history, brazil like so many other continentsized countries, including its emerging peers, russia, india and China has been inward looking, more concerned with its own progress and development than projecting itself abroad.

argaret thatCher, the former UK prime minister, was not the last world leader to proclaim with surprise, as she supposedly did the first time she saw the serried ranks of so paulos skyscrapers: why has nobody told me about this city before? perhaps her advisers had, but brazil did not

Two leaders: Luiz Incio Lula da Silva and Hugo Chvez; Havaianas flip-flops (right)

feet to the embraer executive jets impinge on her consciousness. after flying over your head. less glamorous all, it was only eight years ago, in 2002, brazilian companies, slower to make that brazil attended its first g8 confertheir presence known ence, and that was just abroad, are now raising as an observer. their profile too. Vale, indeed, as leslie the worlds largest bethell, editor of The Brazil has begun to producer, Cambridge History of play a role in regional iron-ore snapped up recently Latin America, notes, and world affairs one of the worlds last it is only in the past great iron-ore mines 20 years or so, since that reflects its size, from under its rivals the end of the cold war natural resource noses. Jbs, the worlds and the passing of the latin american debt wealth and financial largest meat producer, last year bought texas crisis of the 1980s, that and economic heft chicken company pilbrazil has begun to grims pride. earlier play a role in regional this month, gerdau, the steel company, and world affairs commensurate with took full control of its Us subsidiary in its size, natural resource wealth and a $1.6bn deal. financial and economic heft. this has in financial services, banco do brasil, been partly thanks to brazils newsouth americas biggest bank by assets, found confidence, which in turn rests is starting to expand abroad not to on something it has never enjoyed hoover up assets, but to service brazilbefore: political and economic stability. ian companies on their foreign forays. it in the corporate world, new recently paid roughly 500m ($740m) brazils projection for banco patagonia of argentina. of itself is most this all makes good strategic sense. obvious in wellpast domestic crises left brazilian known consumer companies with a legacy of conservabrands, from the tive financial management and mostly havaiana flipsound balance sheets. thus they were flops now worn well placed to take advantage of opporon millions tunities thrown up elsewhere by the of peoples financial crisis. if they have a dominating position in the local market, now is a good time to look overseas. Meanwhile, foreign companies are turning to brazil not just for the size of its booming domestic market, but also as a platform to its spanishspeaking neighbours. at general Motors technical centre in so Caetano do sul, engineers join rolling, global conference calls to discuss new automotive products being designed for the growing number of emerging market consumers. fiats factory in brazil, for example, is the second biggest in the world. the countrys new confidence can also be found, more controversially, in its friends-to-all foreign policy. one of luiz incio lula da silvas great merits as president was to deepen and defend at home the orthodox economic policies launched by fernando henrique Cardoso, his predecessor, even though such policies might well have differed from the ideological positions he held while

Doing business report, worse than Nigeria. the need to boost productivity is especially important given the currencys recent strength, which threatens to bury local companies with cheap imports. if the real continues to strengthen as it has, by the 2016 olympics, brazil wont have any domestic companies, one economist joked cruelly. poor infrastructure less than 10 per cent of roads are paved remains a significant bottleneck. ambitious plans are afoot, including a high-speed train link joining sober so paulo to its historic rival, rio de Janeiro. but this infrastructure project, at least, is unlikely to be completed in time for the world Cup as originally planned. brazil also remains among the worlds most unequal societies. politicians still think little of stealing public money fighting corruption was not one of lula da silvas highest priorities. the drug trade is a growing problem not just in brazilian cities, but also among the outer provinces that serve as transshipment points. as for violence, the death tallies notched up by brazils thuggish police force can make paramilitary groups elsewhere look almost benign. ither waY, the CoUNtrYs and yet the shadows are always clout in international affairs is darkest where the sun shines brightest. now an acknowledged fact. still, what lends the new it will be interesting brazil its excitement to see whether brazil and promise is that continues its rainthe political and bow approach, which Brazil ranked 129th economic stability the embraces iran, among out of 183 countries country has recently others, when lula won make such probda silvas presidency in the World Banks seem manageends this year and the latest Doing Business lemsand solvable. able country loses the shelreport, worse Nowhere will that ter of his charisma, be more apparent than charm and prestige. than Nigeria in the upcoming presiYet despite the dential elections. on important successes of current form, no matter which of the the new brazil, many of the failings of two main candidates wins, it looks as the old brazil remain. Most of them though brazil will transfer power from will be on view when the world comes one democratically elected president to brazil during the 2014 world Cup to another for the first time without a and the olympic games two years later. financial or economic hiccup. the state remains remarkably inefthe skinny boy has come good at ficient and its bureaucracy a barrier to last, and the big boys are looking on in business: brazil ranked 129th out of wonder. n 183 countries in the world banks latest

in opposition. even so, lula da silva led his party to adopt measures whose results are now celebrated around the world, and with good reason. roughly 10m of brazils 192m people joined the ranks of the middle class between 2004 and 2008, and since 1990, poverty levels have halved. Yet that has not been the case in the near abroad. in meetings with regional leaders, such as Venezuelas hugo Chvez or fidel and raul Castro in Cuba, lula da silva has often enthusiastically praised the merits of socialism even though such ideas are notably absent back at home. Moiss Nam, editor of foreign policy magazine, makes a trenchant point. Mr lula da silva has been very good to brazilians, but very bad for millions of his neighbours, he says. those despots who have the luck to count themselves among the brazilian presidents friends, even as they ruin their own countries while brazil progresses, know they can count on his help or, at least, complicit silence.

On the web
Go online for additional features on Brazils economic recovery: n Ed Crooks reports on how the proposed Belo Monte dam project encapsulates the problems facing the countrys large new hydro-power developments n Harvey Morris on how Brazils creaking infrastructure will cope with the demands not only of hosting the 2014 World Cup and the 2016 Olympics, but also of supporting the countrys economic boom n Slideshow: Nicola Copping looks at one of Brazils most high-profile exports: the fashion industry
W W W. f T. c o m / N E W b r a z i l

photos: gettY; alaMY

the New brazil | commeNt

A nations destiny
President Luiz Incio Lula da Silva describes his achievements in reviving a stagnant economy and raising his countrymen from poverty
substantially reduce its vulnerability to hen I look external shocks. We are no longer back on my seven debtors, but have become international years as president creditors. There is no little irony in the of Brazil, I have fact that the union leader who once great reason to shouted IMF out! in the streets has be proud of the achievements of my become the president who paid off Bragovernment. In that time, we have zils debts to the same institution and returned to growth an economy that ended up lending it $14bn. had long been stagnant, taken tens It is particularly of millions of people out of absolute satisfying to have led poverty, created more than 14m formal these changes while jobs and increased workers incomes. strengthening Today, most Brazilians are members of democracy. The the middle class. our internal market has also grown exceptionally, which was crucial in protecting Brazil from the worst Over the past seven effects of the global years, we have taken financial crisis. We did this while tens of millions keeping inflation under of people out of control, reducing the ratio of debt to gross absolute poverty domestic product and and created more rebuilding the regulatory functions of the than 14m jobs Brazilian state. We set in motion a powerful process to improve our infrastructure in energy, housing and social assets through the accelerated growth programme. As part of this, we are eliminating the bottlenecks that have affected our competitiveness in the past what is often called the Brazil cost. I am the first president of Brazil without a university degree, yet my government has built the most universities, and ensured they open their doors to hundreds of thousands of young poor people. Brazil has also been able to

tough criticism I have faced from the opposition and from sections of the media are testament to the health of Brazils democracy. As I near the end of my second term as president, what makes me particularly proud is the place Brazil has come to occupy in the world over the past few years, along with other emerging nations. With them, we are creating the basis of a new international economic and political geography. With them, we have sought to build a world that is more just in social and economic terms free of hunger and misery, respectful of human rights and able to con-

PhoTo: CorBIs

the New brazil | commeNt

front the threat of global warming. But the successes my government has achieved cannot obscure the enormous challenges that still lie ahead. Most importantly, we still have significant amounts of poverty in our country. The creation of opportunities for our young people, in particular, should remain a key objective, as it is central to the future we are building for Brazil. To do this, we must address issues such as how to improve our education system, how to find effective ways of dealing with drugs and violence, and how to offer our young people real choices in terms of work, leisure and culture. some of these initiatives will be decisive in the construction of an economy that is based increasingly on knowledge. The great advances we

to improving peoples have made in the field quality of life. At the of science which have placed us among Reform of our political international level, the best in the world and electoral systems I intend to concen-on trate my attention in this area must initiatives to bencontinue and be trans- cannot wait that lated into technologiwould compromise the efit the countries ofthe latin America and cal progress. advances we have Caribbean, and the But there are also political deficits we enjoyed in recent years continent of Africa. Brazil has much will have to face. The experience it can share. We cannot reform of the Brazilian state, which we be an island of prosperity surrounded have begun, must continue and deepen, by a sea of poverty and social injustice. along with tax reform. The reform of I want to continue the efforts my our political and electoral systems cangovernment has made towards creatnot wait any longer that would coming a multilateral and multipolar world promise the continuity of the advances that is free from hunger and poverty. we have enjoyed in recent years. A world in which peace is no longer a For myself, after leaving the presiutopia, but a concrete possibility. n dency I want to continue to contribute

the new brazil | COMMent

Must try harder

Brazil may have achieved stability, but its economy lacks the dynamism of the other Brics. By Martin Wolf

stability has been the accumulation razil is the country of foreign currency reserves, which of the future and always reached $235bn by February 2010, up will be. so goes an old from $33bn in January 1999. joke. But is it a joke on the yet stability is not dynamism. world at last? has Brazil Growth averaged only 2.9 per cent a anointed by Goldman sachs as the year between 1995 and 2009. While B in Brics at last become a country of the contraction in 2009 was modest, the present? at a mere 0.2 per cent of GDP, the the answer is yes, but only up to international Monetary Fund forecasts a point. Brazil is still a long way from growth from 2010-13 matching the perat an average of 4.5 per formance of india cent, far below rates in and china. it can, and should, do far better. Brazils share of world china and india. at least as imporBrazils great output declined to tant a failing is Brazils achievements of the past decade and a 2.9 per cent in 2009, inequality of income. according to the World half are those of as Chinas and Indias Bank, its distribution stability political and economic. under rose. This is the rise of of income is among the the presidencies of the ICs, not the Brics most unequal in the world. even if growth Fernando henrique were to accelerate, cardoso (1995-2003) most of the benefits are likely to go to and luiz incio lula da silva (2003-), the richest part of the population. it has achieved stable democratic rule. in 1980, chinas GDP per head (at the era of military rule, which ended in purchasing power parity) was just 1985, seems distant; so, too, do the days 7 per cent of Brazils, while indias of inflation, which peaked at an annual was 11 per cent. By 1995, these ratios rate of 2,950 per cent in 1990. had reached 23 per cent and 17 per under the real plan launched by cent, respectively. By 2009, they had cardoso in 1994, inflation was at last reached 63 per cent and 28 per cent. tamed. after lowering inflation via a Between 1995 and 2009, the increase quasi-fixed exchange rate, a currency in Brazilian GDP per head was only 22 crisis in 1999 drove Brazil to adopt a per cent, against 100 per cent for india floating exchange rate. since then, the and 226 per central bank has reduced the intercent for est rate from 45 per cent to a low of china. 8.75 per cent in 2009. Buttressing this

as a result, Brazils share of world output, at purchasing power parity, declined from 3.1 per cent in 1995 to 2.9 per cent in 2009. over the same period, chinas jumped from 5.7 per cent to 12.5 per cent and indias from 3.2 per cent to 5.1 per cent. this, then, is the rise of the ics, not the Brics. Brazil is a paradigmatic example of countries that have fallen into what economists call the middle-income trap. can it do better in future?

GDP per head 2015 compared with 1980

Constant prices (1980=100)
GraPhic: russell Birkett

China 2015

Brazil 2015

1,950.1 472.9
India 2015

152.5

F the ansWer is to Be yes, Brazil must overcome huge structural disadvantages. Most important is its extremely low level of savings. in 2008, according to the World Bank, its gross savings were a mere 17 per cent of GDP, against indias 38 per cent and chinas incredible 54 per cent. unless this is raised to at least 30 per cent of GDP, the chances of sustained and fast growth in living standards are low. Moreover, only 45 per cent of Brazils merchandise exports were manufactured goods in 2008, against 63 per cent for india and 93 per cent for china: industrialisation through trade will be hard to achieve. Brazil has also suffered a massive appreciation of the real exchange rate, estimated by JP Morgan at 156 per cent between october 2002 and april 2010. in addition, the ratio of trade to GDP was 28 per cent in 2008, against indias 51 per cent and chinas 65 per cent. the appreciation of the real exchange rate makes a rise in the economys openness to trade unlikely. the challenge then is clear and daunting: to move from todays stability to tomorrows growth. With a population of 192m in 2008, Brazil cannot become as big a player in the world as the two asian giants, but it could still achieve something far more important than power and influence in the world a prosperous society at home. Much still has to change if that dream is to become reality. n
Financial times | 11

Who will lead?

As Brazils president prepares to step down, there are two frontrunners for succession in the opinion polls. By Jonathan Wheatley

Charismatic leader: Luiz Incio Lula da Silva, president of Brazil, visits a building project of the governments accelerated growth programme in Rio de Janeiro
photo: Getty

f any one fiGure personifies the new Brazil, it is surely Luiz incio Lula da Silva, president since January 1 2003. his childhood journey from rural poverty in Brazils hard-scrabble north-east to the industrial rust belt around So paulo is one that millions of his compatriots have made themselves. his ascendancy from shoeshine boy to lathe operator, from union leader to founder of one of Brazils biggest political parties and thence to the presidency, mirrors Brazils own extraordinary progress over the past decade and a half. his charisma and popularity his support in opinion polls has hardly dipped below 70 per cent during two four-year terms are the perfect symbol for the exuberance and confidence of Brazils rising consumer classes. But Lula da Silvas time is almost up. four months from now, in october, Brazilians must choose a new president. to some, the election makes little difference. Sincerely, i really dont think markets are worried, says rogrio Schmidt of CLp, a So paulo political think-tank. there is a sense that whoever wins, there will be a mix of orthodox and heterodox policies. that view is supported by the fact Brazil has enjoyed broad continuity in macroeconomic policies for the past 16 years. the inflation-busting reforms that laid the basis of todays prosperity were introduced in 1994 by fernando henrique Cardoso, then finance minister and subsequently president from 1995 to 2002. When Lula da Silva was elected to succeed him, Brazils borrowing costs soared as investors worried that the former firebrand leftwinger would lose control of public finances and lead Brazil into default. But Lula da Silva moved quickly to calm such fears, by promising no

the new brazil | politics

rupture with the past and by installing trusted pro-market figures at the finance ministry and central bank (the former lost to a corruption scandal in 2006; the latter still in office today). Many observers expect similar or greater continuity when the president hands over to his successor in January.

therS are LeSS sanguine. they worry that investors take too much comfort from the ease of transition last time around and risk becoming complacent about Brazils future prospects. it worries me that people think this election doesnt matter, says Jim oneill, chief economist at Goldman Sachs and one of Brazils most vocal champions over the past decade. people are getting carried away. he says he has no view on who would make the best presidential successor, as long as that person ensures current macro policies stay in place. the frontrunners in opinion polls are Jos Serra and Dilma rousseff. he was governor of So paulo state (Brazils biggest) and she was Lula da Silvas chief minister until both stood down in april to qualify as candidates. it is often supposed that Serra is the more market-friendly candidate while rousseff is more inclined to enlarge the role of the public sector in the economy to the detriment of the private sector. Serra was a highly successful health minister under Cardoso who has earned a reputation for managerial efficiency and fiscal austerity, not least as governor of So paulo. if, as his centrist opposition party, the pSDB, has argued, what Brazil needs most is a dose of good management, he could be the man for the job.

rousseff has gone out of her way to But rousseff is also billed as a emphasise that if she wins, the three master of management, although with pillars of stability inflation targeting, the emphasis on central planning rather a floating exchange rate and gradual than a minimal state. reductions in public debt will be Lula da Silva calls her the mother untouched. She is also close to Meirelles of the paC [the governments flagship and to antonio palocci, the Lula growth acceleration programme] governments first finance minister who, and she is closely associated with what in terms of economic policy, is probably Brazilians call developmentalism a to the right of Serra. drive for growth and income distribuDoes this mean that rousseff is the tion above all else that pays less atteninvestors choice after all? perhaps, but tion to the need for fiscal reform and perhaps not, for a number of reasons. an overhaul of Brazils tax system and one is that she is not Lula da Silva, and labour laws. may lack the political clout to defend this suggests a broad distinction: the central bank or to hold in check Serra more orthodox, rousseff more the statist instincts of populist. yet this other leaders of their classification does not leftwing party, the hold up to much scruIt worries me pt (and which some tiny. the bastion of commentators say she orthodoxy in the Lula that people think also shares). government has been this election another is that the central bank, led Serra, while erratic on by henrique Meirelles, doesnt matter monetary policy, shows a former head of every sign of being far more hawkish Bank Boston and a former member of on fiscal issues and a dose of fiscal Serras pSDB. hawkishness would be to Brazils benefit although the bank is not independas evidence mounts that the economy is ent by law, it has been given operational overheating, partly due to the exaggerindependence, adjusting interest rates ated presence of the public sector. in pursuit of the governments annual perhaps doubts such as these will inflation targets, often in the face of be clarified as campaigning starts after fierce criticism from all sides, both the World Cup. But, again, perhaps not. inside and outside government. orthodox economic policies have been Serra who was moved to health good for the Brazilian people but they from the planning ministry under have rarely gained much popularity, Cardoso after disagreements with the perhaps because of an enduring belief finance ministry and central bank is in the beneficial influence of the state. among the most vocal critics of Brazils if the opening salvos in the prehigh interest rates. it could be argued campaign period have been any guide, that he would tackle the fiscal problems the election will come down to a dispute that have kept them high for so long. over who is best suited to continue the But he has a reputation as an interwork of Lula da Silva. ventionist and in recent interviews has With the most popular president in done little to dispel a concern among Brazilian history making it the declared many economists that he would attempt priority of his final year to reduce interest rates at the stroke of to get her elected a pen. this, many observers fear, would as his successor, not only undermine the credibility of rousseff monetary policy but also cause a mass has got to be walk-out of the central banks most the one to competent directors. the impact on beat. n investor confidence could be disastrous. Vying for the presidency: Dilma Rousseff (left) and Jos Serra

photos: getty

City of dreams: So Paulo has become a hot spot for global investment bankers

the new brazil | economy

Good fortune
With little debt and plentiful growth, the economy of Brazil is becoming the envy of many other developing nations. By John Paul Rathbone

to grow by as much as 8 per cent and, eiTHer a bOrrOwer by some measures, is expanding at a nor a lender be, Polorate of 10 per cent. Unemployment has nius warns his son in fallen to record lows. The countrys net Shakespeares Hamlet. debt, at 42 per cent of GDP, is at a level For loan oft loses both that makes much of the developed itself and friend, and borrowing dulls world green with envy, while its banks the edge of husbandry. are well capitalised. in april, bank Towards the end of 2009, brazil credit grew at a rate of roughly 18 per only half took Poloniuss sententious cent, while retail sales rose by 30 per advice even if it was the better half cent in March alone. when it loaned $14bn to the interas a result, brazil is awash with national Monetary Fund to boost the foreign capital. Last October, the cenmultilateral lenders coffers in the tral bank imposed a 2 per cent tax on midst of the global financial crisis. The short-term capital inflows to try to slow loan was a potent signal of brazils the boom. it made little difference, and new-found economic confidence. the real continued to strengthen. it also represented a remarkable The contrast between brazils curreversal of fortunes. eleven years rent good fortune and most of the deveearlier, facing its own financial crisis, loped world is striking. brazil had been forced indeed, on the same to devalue its curday that the eU agreed rency, the real, and a $1,000bn rescue ask the iMF for a We were one of package to try to $42bn loan, one of prevent Greek rot from the washington-based the last countries becoming a case of lenders biggest-ever to go into the global fully fledged european rescue packages. crisis. And we have gangrene, Guido ManToday, however, the tega, brazils finance been one of the first boot is firmly on the minister, brushed off other foot. while most to come out the eurozones distant of the developed world problems. worries about exceseurope was asleep, he told a group sive debt and stunted economic growth, of investors at an FT conference held brazil has little of the former and an at the neo-classical splendour of the abundance of the latter. we were Copacabana Palace Hotel in rio de one of the last countries to go into the Janeiro. but its crisis is not going to global crisis, Luiz incio Lula da Silva, hurt brazils economy. There may be brazils president, told the Financial some turbulence in financial markets. Times shortly after his country lent the but it will pass. money to the iMF. and we have been For the moment, brazil is relishing one of the first to come out. its new-found dynamism. and with after a short and relatively shalthis confidence has come a palpable low recession, the brazilian economy sense of optimism about its future. is now flying. This year it is expected
Financial times | 17

PHOTO: GeTTy

the new brazil | economy

There is huge foreign interest, Thanks to the orthodox antisays James Sinclair, head of CFS inflation policies of former president Partners, an investment bank bouFernando Henrique Cardoso, subsetique. emblematic of this interest quently continued by Mr Lula da Silva, was the attempt in May by Spains the hyperinflation that blighted the Telefnica to buy out its partner, Porcountry in the 1980s is a nightmare tugal Telecom, from Vivo, their jointly that nobody remembers. exports have owned operation that is brazils biggest quintupled in value over the past mobile phone operator. Telefnica 20 years. Foreign debt has fallen to just offered a 150 per cent premium to PT 4 per cent of GDP. for its share. but given that Vivo is one More importantly, between 2004 of both PT and Telefnicas few bright and 2008, the level of poverty fell spots, the offer was not enough. from almost half of brazils 192m population to roughly a quarter. Over the same period, and helped by an UCH OF THe COUNTryS income transfer programme called recent economic and finanbolsa famlia, roughly 10m brazilians cial success stems from its joined the ranks of the middle class, own policy efforts, but a large part is defined as households with a monthly also due to sheer good luck. Scarred income of r$1,100 ($610) or more. by past crises, brazilian banks spent all this is a source of pride for Mr Lula most of the noughties at home rather da Silva, 64, a former lathe operator than venturing abroad. They therefore who began his political career in So avoided loading up Paulo as a trade union leader. in one of the worlds most unequal societies, his rise is a potent symbol of social mobility and hope. This growth and hope has also had profound economic consequences. brazils several million new consumers have created an internal market that multinational companies are scrambling to tap. brazil is poised to overtake Germany as the worlds fourth-biggest vehicle market. weve doubled our with the sub-prime manufacturing capability, says loans that later almost antonio roberto Cortes, chief execusank the wests financial tive of Latin american operations at system. The asia-driven comMaN, the German truck maker. modity boom then kept brazil So Paulo has also going through the become a hot spot worst of the global for global investment downturn, while its bankers. The flotation Cuts in government social policies shielded by Santander, Spains the poor. Near-zero spending will be biggest bank, of its US interest rates, required to cool brazilian subsidiary meanwhile, began to raised $8bn in 2009s deluge the country down Brazils biggest initial public with cheap money. red-hot economy offering, and valued These capital the unit more than the inflows are a mixed entire worth of Deutsche bank worldblessing. brazil, with its low savings wide. The bM&Fbovespa, the brazilian rate, will always need foreign capital exchange, currently trades more single to finance its growth. bNDeS, the equity options than any other derivastate-owned development bank, has a tives market in the world. and then balance sheet bigger than the world there are mergers and acquisitions. banks. yet even that is not enough to

meet brazils vast investment needs, such as the $500bn of planned infrastructure investments envisaged by 2014. but the inrush of foreign money also threatens to drive the real to levels that threaten the competitiveness of local exporters. Cheap imports could, meanwhile, undercut the viability of local manufacturers. it is probably no accident that increasing numbers of brazilians firms are setting up operations abroad. indeed, the country may be enjoying too much of a good thing. either high commodity prices or low US interest rates would be enough to sustain a boom and often have in the past. but brazil has them both at the same time. as the iMF warned in its latest regional outlook, it is an unprecedented bonanza. The challenge now is how best to manage the bounty without pigging out. as Nicols eyzaguirre, the iMFs regional director, has put it: avocadoes are good; so are cream, whiskey and tomatoes. but mixing them all together makes you pretty sick. a sense of complacency that the good times of the past 10 years will inevitably continue for the next 10 may therefore be brazils greatest threat. with the economy growing faster than the 5 per cent rate it can currently sustain safely without further structural reforms, inflation has risen above the central banks 4.5 per cent target. in april, that prompted the first in a series of interest rates hikes that are expected to take the benchmark Selic rate to almost 12 per cent. That would be an unthinkable level in the US or europe. Unfortunately, it may also serve to attract even more foreign capital, so driving the real to ever more uncompetitive levels. The effects of this can already be seen in the widening current account deficit. while exports have been growing at a 30 per cent rate, imports are rising almost twice as fast. Cuts in government spending will be required to cool down brazils redhot economy, although applying such restraint in an election year will not be easy. but without it, the country could in time face the same financial vulnerabilities that have done for its economy so often in the past. as Cassius told brutus in Shakespeares Julius Caesar, men and countries can be masters of their fate. exercising that mastery would be the truest sign of brazils coming of age. n

1 3 8 | | F F i n a n c i a l tt i m e s inancial imes

PHOTO: GeTTy

Bumper harvest
Brazils central plateau has been transformed into a global agricultural powerhouse, writes Jonathan Wheatley

photo: corbis

t h e n e w b r a z i l | a g r i c u lt u r e

Bean-feast: workers harvest soya on a farm in Bahia. Brazil produced 67m tonnes of soya beans last year

above all, there is a lot of virgin ndr pessa stands land and it is still relatively cheap. this in a field of cotton that means farmers here can apply from stretches across a wide scratch the lessons learned over the plateau to the horizon past 20 or 30 years as central brazil, and beyond. formerly regarded as useless for agrithe vast field is part of a farm near culture, has been transformed into one the town of Lus eduardo Magalhes of the worlds most fertile regions. in the far west of the state of bahia. Like the farmers in Mato Grosso, Like many in the region, it is owned those in western bahia treat the soil by foreign investors: in this instance, with nutrients and put down chalk to agrifirma brazil, a UK farm fund reduce its acidity. they rotate crops set up in 2008 and backed by Jacob typically soya, maize and cotton rothschild and Jim slater, the former to keep soil rich. corporate raider. they use the latest i think this region technology, in crop is almost a laboraThese farmers use varieties developed tory for what we will for the tropics and see in other parts of the latest technology in combine harvestbrazils agricultural ers with satellite frontier, says pessa, in crop varieties and guidance systems a partner at agrocombine harvesters accurate to within a consult, a farm with sat-nav systems few inches. consultancy. but unlike farmers investors have accurate to inches in other parts of brabeen attracted to zil, they have managed to avoid some western bahia and, increasingly, to of the pitfalls encountered during the parts of the neighbouring states of countrys rapid agricultural developpiau, Maranho and tocantins by a ment. Many farmers colonised the unique combination of circumstances. centre-west and parts of the amazon Land here is flat, on a plateau about basin during the military dictatorship 800m-1,000m above sea level, which of the mid-1960s to the mid-1980s, means that even if the days are scorchwhen they were helped by government ing, the evenings are cool (an imporincentives and little regard was paid to tant consideration not only for forsocial or environmental issues. eigners but also for the many farmers some of them simply ignored who have migrated here from brazils environmental regulations that were south). rainfall is adequate and, crurarely enforced, tearing down the cially, predictable. transport logistics, scrubby cerrado woodland and, further it is true, remain problematic, but the north, the amazon rainforest, often for distance to market is much less than in ranching. others were placed outside brazils other big agricultural frontier the law by new legislation in the 1990s in Mato Grosso state, to the west.

Greener on the other side: modern farms adhere to strict labour and environmental regulations

that reduced the amount of land they could clear for farming or ranching. Labour laws were also ignored, with workers often housed in menial conditions and on minimal pay that amounted to slavery. etter enforceMent, education and pressure from environmental groups and the market have brought many improvements. and because western bahia and the surrounding areas have been settled relatively recently, many farms have been established using modern practices and governance that those in other parts in brazil have adopted only slowly, if at all. for investors here, being associated with the kind of practices that have often tarnished brazilian agriculture in the past is not a risk they are prepared to take. You have investors who follow your day-to-day activities, and no investor wants the risk of being involved in a situation that infringes the law, says
22 | Financial times

pessa. this is the big change. its another type of capital and another way of doing business. this means not only that farmers are rigorous in obeying environmental and labour laws, but that they also adopt best practice at all levels of the operation, from the correct use of fertilisers and pesticides to hiring reputable lawyers and accountants and not relying upon friends or relatives, as is common elsewhere. because of their commitment to the bottom line, they pay special attention to how their crops are commercialised and to hedging against fluctuations in commodity prices and exchange rates. farms here also tend to be big: tens or even hundreds of thousands of hectares, rather than the 40-50 hectares many farmers of the previous generation used to work. efficiency is gained much more quickly; workers are properly trained, clad, housed and fed, and they are also retained for longer and have a stake in the business, which

offers them stable employment and the prospect of promotion. not all farms around Lus eduardo Magalhes are run along these lines. such farms may not even be in the majority yet, but will be soon. already, they have enough weight to have created a culture of good governance that other farms will find it almost impossible to ignore. Many farms, for example, have introduced profitsharing for their workers. any farms unwilling to follow risk losing their best employees. We are very, very positive about brazil, says Martin richenhagen, chief executive of aGco, the farm machinery manufacturer. it is one of very few countries that has not only resources but also very professional farmers. the expansion of farming into Mato Grosso and other parts of central brazil has already created a global agricultural powerhouse. from a middling agricultural country just two decades ago, brazil has become

t h e n e w b r a z i l | a g r i c u lt u r e

e nd o f the road?

Highways impede productivity, writes Jonathan Wheatley

the worlds biggest exporter of beef, chicken, orange juice, green coffee, sugar, ethanol, tobacco and the soya complex of beans, meal and oil, as well as its fourth-biggest exporter of maize and pork. it has achieved this by opening new land for farming and by making enormous efficiency gains. over the past two decades, productivity measured in tonnes of grain produced per hectare has doubled, according to roberto rodrigues, a former minister of agriculture and now a consultant and professor at GV agro, part of the fGV-eaesp business school in so paulo. What has often been lacking is good governance and, with it, the capital to deliver the kind of growth to take brazilian agribusiness to the next level. this region will overtake other frontier regions, and other new areas will develop along the same lines, says pessa. its a much more sustainable model. and its excellent for the country. n

n spite of the efficiency gains Brazils farmers have achieved over the past two decades, they still face one significant constraint on competitiveness: transport. According to Agroconsult, a farm consultancy, it will cost an average of $103 to transport a tonne of soya from Mato Grosso in central Brazil to ports in the countrys south-east during the current harvest. That compares with a field-to-port cost of just $22 in the US and $17 in Argentina both important competitors of Brazils on world markets. Even in Paran, southern Brazil, where the distance to port is much shorter, the average cost per tonne will be $44. The reason is simple: the extreme paucity of rail and river transport, ideally suited to carrying relatively low-value goods over long distances when time is not of the essence. In Brazil, in spite of the countrys continental dimensions, roughly 70 per cent of cargoes are carried by road. Most highways are poorly paved, if at all, which means high maintenance costs for lorries, many of them old and long past their best. Rising fuel prices and punitive taxes add to the burden. It would not take much to turn this situation on its head. Brazil is blessed with one of the worlds greatest river systems.

In spite of efficiency gains farmers have made over the past two decades, one big constraint on competitiveness remains: transport

Apart from a chain of mountains along the coast, much of its countryside is flat, making it easy to build railways. Yet a chronic shortage of investment has left these advantages largely untapped. This is starting to change: a railway from Belm at the mouth of the Amazon to the interior of So Paulo state 1,700 miles to the south has been under painfully slow construction since 1987, although progress has speeded up recently. Other railways privatised in the late 1990s have taken some of the burden off highways in the south. Two more railroads that will connect central Brazil to ports in the states of Rio de Janeiro and Bahia are being readied for construction. Some investors are already taking a punt that these will indeed be built and quickly. The prices youre seeing for land good for soya beans in the north of Brazil are taking into account the fact they expect to have infrastructure improvements that will allow these properties to be more profitable further down the road, says James Sinclair of CFS Partners, a So Paulo boutique investment bank involved in farm deals. [But] if these infrastructure improvements are not put in place, some of the prices theyre talking about are too high. n

photos: panos

Financial times

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T H E n E w b r a z i l | p H o T o E s s ay

Human capital
The inauguration of Braslia in 1960 as the nations new seat of government crowned an era of optimism, growth and reform. That spirit has returned, says Jonathan Wheatley
photo: corbis

t is 50 years since brazil made its most emphatic statement of faith in the future: the inauguration of braslia, the capital city built from scratch in the vast emptiness of brazils central plateau. the parallels between the brazil of 1960 and the brazil of 2010 are striking. then, as now, brazil was led by a developmentalist. the presidency of Juscelino Kubitschek, from 1956 to 1961, was known as the 50 years in five. it was a period of intense publicly funded investment that went beyond the building of braslia and laid the ground for rapid economic growth in the 1960s of more than 6 per cent a year. Luiz incio Lula da silva, who likes to be compared to Kubitschek, has a similar faith in the role of the state and the importance of investment, although his own projects have been less grandiose and somewhat slower moving. nevertheless, he leaves office at the end of this year with growth also trending above 6 per cent. Kubitschek, like Getlio Vargas (1930-45 and

Built from scratch: Braslia, as seen from the top of Congress, including both parliamentary chambers and the ministry of justice all designed by renowned architect Oscar Niemeyer

T H E n E w b r a z i l | p H o T o E s s ay

Above all, in 2010 as in 1960, Brazil is alive with the excitement of the new and the promise of the future
Inauguration day, 1960 ( far right): a worker shows his family the new city. In the background is the National Congress by Niemeyer. The interior is shown above, while the architect is seen in front of the same building (below, middle); President Kubitschek opens a housing block (bottom right); a worker during Braslias construction, which took less than four years (right)

1951-54), has an assured place in history as one of brazils greatest presidents. Lula da silva would love to join them; he is already, according to opinion polls, its most popular president to date. above all, in 2010 as in 1960, brazil is alive with the excitement of the new and the promise of the future. Fifty years later, though, braslias position in the nations affections is less certain than its geographic centrality. it provokes pride and admiration for its beautiful and spectacular architecture; confusion and alienation, especially among first-time visitors, for its often inhuman scale; and something approaching shame and loathing for its distant, inward-looking political cliques. brazilians of today know that progress and development are made in incremental steps, not through grand or populist gestures. n
26 | Financial times

photos: eyeVine; Getty; maGnum

the new Brazil | profiles

Jonathan Wheatley and Vincent Bevins profile five men who can each claim his part in Brazils rise from running its capital markets to Rios Olympic selection

e i k e Bat i s ta
ike Batista is BraZiLs richest man, with a fortune estimated at $27bn, and the eighth richest in the world, according to Forbes magazine. He has been used to media attention from an early age; his father, eliezer, helped turn stateowned miner companhia Vale do rio doce later privatised and renamed Vale into the worlds biggest producer of iron ore and the second-largest mining company in the world. raised as a polyglot in europe, Batista sought financial independence while studying engineering at the University of aachen by selling insurance door to door. Back in Brazil, he hit the headlines in 1991 by dropping his society bride-to-be for model and carnival queen Luma de Oliveira, with whom he went on to have two children. His enthusiasm for extreme speedboats earned him Brazilian, american and world championships. But Batista is not the playboy his early fame suggests. He no longer races speedboats but recently secured a 10-year contract to host the sports world championships, held for the first time this year off rio de Janeiro. Brought up with mining and logistics, Batista has made these his own business since the early 1980s, first as an intermediary for diamond and gold miners in the amazon, and later by developing his own mines in Brazil and overseas. From 2000, he concentrated his attention on Brazil and created eBX (his initials, plus X for multiplier of value) and its subsidiaries MMX (mining), MPX (energy), OGX (oil and gas), LLX (logistics) and OsX (shipbuilding and other supplies for the oil and gas industry). He achieved something close to notoriety among Brazils often-sceptical media when he raised roughly $10bn
28 | Financial times

credit

PHOtOs: PaULO FridMan; MatriX; BLOOMBerG

The power set

from the initial public offerings of all five companies between 2004 and 2008, with little more to offer investors than ambitious plans. But his companies investments are on schedule and beginning to live up to their promises. MMX which sold some of its mines to anglo american for $5.5bn in 2008 is already producing iron ore. MPX and OGX will be delivering energy and oil by mid-2011. LLXs first port, sudeste, will be operational by the end of 2011 and au superport by the following year. OsXs first shipyard is also due to commence operations by 2012. Batista jokes that he is delivering his own private Pac to Brazil a reference to the governments flagship accelerated growth programme, designed to deliver the infrastructure Brazil so badly needs. it is not a bad assessment. JW

andr esteves

He yOUtHFUL Face of andr esteves (right) has been spotted at some of the main events within Brazils fast-growing capital markets recently. He was there when cosan, Brazils biggest sugar and alcohol group, announced its $4.9bn merger with royal dutch Eike Batista is shell one of 13 mergers and Brazils richest acquisitions man, with a fortune worth some estimated at $27bn, $12.5bn that esteves according to investment Forbes magazine bank, BtG Pactual, has been involved in over the past nine months. during the same period it has also taken part in initial public offerings that raised a total of $24.5bn for 11 clients, including spains santander, whose iPO of its Brazilian subsidiary was the worlds biggest last year. Formerly as media shy as most Brazilian investment bankers, esteves has emerged as the public face of the countrys meritocratic investment banking culture, and he is expected by many to challenge billionaire entrepreneur eike Batista (left) for the position of Brazils wealthiest individual. But although esteves admits to having more money than he can spend, he says getting rich was never his main motivation. i never worked hard

so that i could sell up and go to the beach, he told the Ft shortly before the santander iPO. i have always worked to be part of something bigger, to be a driver of change. His pace of activity suggests he is already there. esteves first joined BtG Pactual as a 21-year-old systems analyst in 1989. He rose quickly and, in 1999, he and younger partners wrested control from its founders, leading Pactual through one of the fastest periods of expansion in Brazils capital markets. what happened to Pactual between 2006 and 2009, when it was owned by swiss bank UBs, is the stuff of modern legend. UBs claims it bought it for $2.6bn in 2006 and sold it back to esteves and partners in a fire sale forced on it by the global crisis for $2.5bn. People in Brazil give different figures: they say Pactual was sold for $2.9bn with equity of $300m (after capital had been shared out to partners) and bought back for $2.2bn with equity of $2.1bn. as one person put it: sometimes you can have your cake and eat it. either way, it left esteves in charge of one of Brazils most powerful investment banks. a force for change indeed. JW

n i z a n G ua n a e s

iZan GUanaes Views himself as an ambassador for his country. the chairman of Grupo aBc, Brazils largest advertising and marketing services group, believes the expansion of aBc abroad is helping to promote Brazil and, as such, to transform the countrys economic role. Brazil is an emerging market, Guanaes says. we need to be seen as an emerging culture. we have to move from being a commodity country to building world brands from Brazil. Born and raised in the city of salvador, the young Guanaes also spent some of his formative years in the Uk. after returning to Brazil, he built a reputation as a skilled advertising copywriter. in one memorable television advertisement he worked on, entitled Hitler, for newspaper Folha de so Paulo, a camera pans out from an extreme close-up of the German dictator while a voice recounts his achievements. when the infamous face becomes clear, another voice says: it is possible to tell a heap of lies while only speaking the truth. in 1989, Guanaes took over the dM9 agency with business partner Joo augusto Guga Valente. in 2000, dM9 was acquired by ddB worldwide for $111m, and Guanaes left advertising as part of a non-competition agreement to launch internet portal iG. two years later, he returned to take over dM9ddB with Valente, and founded the advertising agency africa. these companies were the first in what later became Grupo aBc, a holding company that comprised 18 companies with operations ranging from ads and branding to promoting Brazils beach fashion events and putting on musicals. now the worlds 20th-largest communications group, with annual revenues of $277m, Grupo aBcs

the new Brazil | profiles

international clients include Peugeot, wal-Mart and Procter & Gamble. dividing his time between new york and so Paulo, Guanaes remains committed to expanding operations further, particularly into businesses with a digital focus. in the past two years, Grupo aBc has acquired two californian agencies, dojo and Pereira & Odell (the latter voted californias best digital agency), while another of his companies (he declines to say which) has signed a contract with Lucasarts. an eager participant in the clinton Global initiative who boosts his own image by attending events such as davos, Guanaes argues that Brazil should seize the opportunity and do the same. Brazil wants to know, and be known, he says. VB

Ca r l o s n u z m a n

ew Men can cLaiM tO have bested Barack Obama. But despite a last-minute intervention from the Us president, it was carlos arthur nuzman who was victorious in the Olympic bidding sweepstakes last October. crowds on the streets and beaches of his native rio de Janeiro burst into celebration at the news their city would be hosting the summer Olympics in 2016. it was a long time coming, some said: no south american country had ever hosted the games. But as president of the Brazilian Olympic committee (cOB), nuzman made the case that Brazil could rise to the challenge. and now, as chairman of the organising committee, he must prove it. Olympic firsts are familiar to him: in the 1964 tokyo games he competed for Brazil in his own sport, volleyball. Later, having launched a career as a lawyer and businessman, nuzman
| Financial times

took over as head of the Brazilian volleyball confederation, and the international success of Brazilian volleyball teams is often attributed to his leadership between 1975 and 1996. as cOB president, nuzmans bid to stage the Olympics in rio in 2004 was thwarted, but he brought the Pan american Games there in 2007, showcasing the citys talents in preparation for the 2016 bid. He also launched a training programme for athletes and coaches, and was able to get the full backing of the government for his Olympic bid. nuzman will have few worries about sportsmanship or enthusiasm at the rio Olympics. Far more challenging are the twin obstacles of inadequate infrastructure and the threat of violence. the often shocking levels of lawlessness in the favelas that surround rio can be addressed, he said during the bid process, through a special security project for the Olympic village, relying on the armed forces if need be. the infrastructure challenge may prove to be more difficult to overcome. Brazil has longer to prepare for the Olympics than for the world cup in 2014, but rumours are already swirling that the Brazilian football confederation, under the leadership of the controversial ricardo teixeira, is behind on many of its construction timetables. the country is woefully behind in infrastructure building generally. it will fall on nuzman to show that Brazil can handle the responsibility that he, and many others, have long argued it deserves. VB

edemir pinto

deMir PintO Has seen remarkable changes since he took over as head of BM&FBovespa, Brazils multi-asset exchange. He became chief executive in 2008, shortly after BM&FBovespa was created by the merger of the countrys futures exchange and the so Paulo stock exchange. in two years, Pinto (right) has overseen rapid growth in Brazils exchange trading, and the emergence of the country as an increasingly soughtafter investment destination

so much so that Brazils combined securities, futures and commodities exchange has become the worlds thirdlargest exchange by market value. an economist by training, Pinto joined the BM&F futures exchange in 1986, becoming responsible for risk management and settlement the following year. By 1999, he was chief executive. when BM&F merged with Bovespa, he initially served as co-chief executive and chief financial officer of the new company. as Brazil shrugged off the effects of the global financial crisis and interest rates plummeted in developed countries, capital poured into Brazil to the point where the government imposed a 2 per cent tax on foreign portfolio investments to slow appreciation of the real. Pinto worried that Brazilian equities were under friendly fire that investors might simply prefer to buy shares of Brazilian companies listed abroad rather than at home. in the end, the tax proved largely symbolic and did not roll back BM&FBovespas growth. in spite of a drop-off at the beginning of this year, the ibovespa, Brazils main equity index, has almost tripled in dollar value since March 2009. Pinto says Brazils experience with crises has left the country with sound financial regulation, which provides stability for investors. we did a review of the regulation of our exchange, and dont think we have anything to improve, he says. weve done that. Under Pinto, BM&FBovespa has reached several growth milestones recently. in March, the number of options traded exceeded those traded on any Us exchange. in May, the exchange received an investment-grade rating from Moodys, the rating agency. Pinto says capital markets in Brazil could stand to be less dependent on foreign money, and there is room for internal demand to grow. But he recently claimed: By the end of next year we will be the secondbiggest exchange group in the world. VB n

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PHOtOs: cOrBis

Fuel for a nation

Discoveries of oil and gas have boosted Brazils economic clout, but the country has also made advances in other forms of power generation. By Ed Crooks

about 2.4-2.5 TOe per head, let alone nce seen as the Us, which uses 7.8 TOe per head. cursed by its lack of In electricity, the disparity is similar. fossil fuels, Brazil is now Brazils yearly power consumption is commonly depicted as an roughly 2.2 megawatt hours per capita energy cornucopia. per year, compared with 3.7MWh in The discovery of the vast pre-salt Poland, 4.9MWh in Portugal, and oil fields in the deep waters off the 13.7MWh in the Us. countrys southern coast, along with Brazil has been a success story in large volumes of potentially valuable terms of access to electricity: about gas, has raised the prospect that Brazil 97 per cent of the population is now could meet all of its own energy needs connected, but the system requires and become a significant exporter of oil continuous investment to meet rising and perhaps even gas. demand. The rule of thumb is that However, while the opportunities electricity consumption grows by are huge, so are some of the problems. roughly 1 percentage point more than The country faces an enormous chalthe economy, so with growth estimated lenge to deliver the reliable energy at approximately 7 per cent for 2010, supplies needed to fuel its development power demand could grow by about and meet aspirations for improved 8 per cent. living standards. The countrys reliance on hydroBrazils apparently meagre endowpower may be good ment of coal, gas and for its carbon-dioxide oil was a great stimuemissions and dependlus to innovation, and ence on imported fossil the country pioneered Hydro-power fuels, but it can cause renewable energy long provides roughly problems of its own. before many develfour-fifths of In 2001, the electricity oped economies. system suffered severe as antonio Dias Brazils electricity shortages, caused Leite, the mines and by a combination of energy minister during drought and previous underinvestment. the 1970s who is the author of a definiThis in turn caused significant damage tive study of Brazils energy system, puts to the economy, cutting growth to about it, the countrys development of hydro1 per cent in that year. electric power for electricity and sugarMauricio Bahr, the chief executive cane ethanol for transport fuel means of GDF suez energy Latin america, it occupies an outstanding position in the French-owned group that is the world regarding the proportion of Brazils largest private sector electricity renewable energy in its energy matrix. generator, says rising power demand Hydro-power provides roughly fourmeans the industry has enormous fifths of Brazils electricity, and renewapotential to grow. bles overall meet nearly 45 per cent of We are too far away from the standthe countrys energy needs. ard of power consumption in developed However, those needs are growing countries, he says. If you combine that fast. Brazils energy consumption is still huge potential demand with our huge well below developed-country levels, at potential resources, there is a great about 1.2 tonnes of oil equivalent (TOe) opportunity there. per capita per year: less than half the He adds that the structure of the level of the poorer members of the eU electricity industry under Luiz Insuch as Portugal and Poland, which use
32 | Financial times

Force of nature: the Itaipu Dam hydroelectric power station on the Paran River located on the border between Brazil and Paraguay

PHOTO: PanOs

t h e n e w b r a z i l | e n e r gy

cio Lula da silva, who was elected as president in 2002, is highly favourable to private sector investment. Government agencies co-ordinate projections of power demand from the largely privately owned electricity distributors, and generators sign long-term supply contracts that allow them to finance their investments. The regulatory side today is very predictable, and once you have a concession, you can show a revenue stream for 30 years, Bahr says. However, the development of new hydro-power projects is hampered by growing concern about the effect of dam building on local communities and the environment, as reflected in the international campaign against the Belo Monte project planned for the amazon region. new projects are designed very differently from the giant dams of the past, and use newer, more advanced turbines in an attempt to minimise their impact on local communities. GDFs Jirau dam, and the santo antonio dam being built by Odebrecht, the Brazilian construction group, both on the Madeira river in the far west of

offer the prospect the country, require that the country will much less flooding per become a significant megawatt of electricity The country is exporter. But the oil is generated than dams using only about hard to access, often from the 1960s, but 23,000 feet below sea that has not been suf- 30 per cent of level under layers of ficient to satisfy their its hydro-power water, salt and rock. opponents. BPs massive oil spill potential While in most in the Gulf of Mexico is developed countries a reminder of the hazards of extracting all the potential for hydro-power has oil in such deep waters. generally been exploited, Brazil still For gas, the problems are even has huge untapped resources. even more daunting. Piping the gas to shore allowing for the more restricted seems out of the question owing to style of development now used to the long distances involved, and the try to meet environmental most promising route appears to be concerns, the country is using liquefying it offshore, on floating plants. only about 30 per cent of its That, however, is a new and untried hydro-power potential. technology, and will hold difficulties of even so, the limitations of its own. although Brazil is also trying hydro-power mean there is to develop other sources of domestic still interest in developing more gas, and has built two terminals for coal- and gas-fired plants which importing liquefied natural gas, it looks now provide roughly 13 per cent likely to have to rely on the 2,000-mile of Brazils electricity and more pipeline from Bolivia as its main source nuclear plants in addition to of imports, even as the share of liquethe two already in operation, fied natural gas grows. which generate a further so while Brazil now has a portfolio 2 per cent. of energy resources that any country However, supplies of fossil would want, it still has a long way to fuels remain limited. For oil, go before it can really be said to have a Brazil is now self-sufficient, similarly enviable level of provision. n and the offshore pre-salt fields Fossil fuel: Luiz Incio Lula da Silva (centre), president of Brazil, and Jos Sergio Gabrielli ( front left), president of the state oil company Petrobras, visit an oil rig near the city of Vitria

PHOTO: cOrBIs

Waste land: devastation in the Amazon rainforest, burned to create charcoal and clear for cattle

The long road to conservation

photo: panos

Despite the appalling plunder of its rainforest in past years, Brazil is determined to halt the destruction and sow the seeds of new hope. By Fiona Harvey

lying over the amazon rainforest, the scale of the wilderness is hard to comprehend. More than half the worlds rainforest lies in Brazil and the amazon. so huge and so impossible to conquer that it is still home to an estimated 40-50 uncontacted tribes and contains thousands of unique species of plant and animal. and yet, for enormous sections at its edges and radiating out from its few urbanised centres, the encroachment into the forest is obvious. large sections have been cleared, often for ranches grazing thousands of cattle, stretching for many miles. the rainforests of Brazil have been an icon of the environmental movement for years, as the scale of destruction has become apparent: an estimated 230,000 sq miles have been lost since 1970. Brazil points to success in slowing the rate of deforestation under president luiz incio lula da silva: in 2004, a near-record of at least 4,100 sq miles (an area almost the size of

Jamaica) was cut down, but in recent years that rate has more than halved. But severe problems remain. one is governance: exerting control over such a huge area is impossible, and the government struggles to limit illegal logging and other activities. satellite images, including google Maps, are helping, but more resources are needed. another is that the Brazilian government must perform a delicate balancing act between the powerful interests of the ranchers and soy farmers, and the activities of landless peasants who venture into the forest simply to cut down a few acres where they can grow food for their families. to shift that balance in favour of conservation requires money. if forested nations not just Brazil but also indonesia, Malaysia and the Democratic republic of Congo were rewarded for keeping their forests standing, deforestation could be slowed and halted relatively quickly. For decades, the world has failed to agree on a way of achieving this. at the Copenhagen climate summit last

December, governments failed to create a mechanism that would ensure the transfer of money from developed to forested nations. a breakthrough came at last in May, when norway led an agreement among several countries that will result in the transfer of $4bn for forest preservation. the first beneficiary of the agreement, called reducing emissions from Deforestation and Forest Degradation (redd), will be indonesia, which is to receive $1bn from norway. however, Brazil was also represented and will be included in future talks. Brazil actively participated in the process of developing the initiative, and considers it essential to ensuring sustainable forest management in the coming years, says izabella teixeira, Brazils environment minister. redd is important because it demonstrates that global partnership is possible. She says redd can go ahead without the global treaty nations are still hoping to draw up to replace the Kyoto protocol when its main provisions

the new Brazil | environment

expire in 2012. Brazil firmly believes in the formal negotiation process, but in the meantime, climate change is too important to wait, she says. We need to show the world action. redd will set an interim foundation for the formal strategy that is eventually negotiated.

eCently, the Brazilian government announced an expansion of palm-oil production. its plan is to ensure that this will be done in an environmentally responsible and sustainable manner, by only using land already degraded. Cutting down native vegetation for palm-oil plantations will be forbidden. the government argues this will provide jobs and prosperity as an alternative to destroying forest. green organisations are also taking steps to try to link the destruction of the amazon rainforest with the activities of people in the developed world. greenpeace scored a major success last year with a campaign directed towards luxury goods companies and food producers. it managed to trace the leather in luxury goods and meat in certain food products sold in western supermarkets back to cattle that had been raised in the amazon. although many processing companies in Brazil are supposed to have rules in place to ensure their supply chain does not include amazonian cattle, greenpeace found evidence of breaches. the campaign worked, as several luxury goods retailers and food producers said they would examine their

country aims to reduce its greenhouse supply chains and processors to ensure gas emissions by between 36 per cent that no cattle farmed in the amazon and 39 per cent by 2020, relative to could find its way into their products. business as usual. that should amount sarah shoraka, greenpeace forests to an absolute reduction of roughly campaigner, says: Companies are 20 per cent on 2005 levels. driving the destruction of the amazon the government is also keen to by buying beef and leather products portray Brazil as an example of a from unscrupulous suppliers in Brazil. green economy. For years, drivers the cattle industry is the single biggest have used biofuel produced from the cause of deforestation in the world countrys massive sugar-cane plantaand is a disaster for the fight against tions. Brazils ethanol plants are widely climate change. global brands must acknowledged as the most advanced take a stand. and efficient in the world. For instance, as well as taking part in the redd they require much less energy to distil initiative, Brazil has become much the fuel as they use plant waste, known more engaged in ongoing international as bagasse, for heating. climate change talks. a frustration for as the Copenhagen Brazil, however, talks looked like Brazil firmly believes has been the tariffs breaking down in their final stages, the in formal negotiation, imposed by other the countries (chiefly so-called Basic nations Us) on imports of its Brazil, south africa, but climate change is China and india got too important to wait biofuels. the government hopes this might together with Us we need to show eventually be resolved, president Barack perhaps as a byprodobama and forged a the world action uct of the climate compromise. they put change talks. however, the role of their names to a short-term agreement biofuels in the Brazilian economy may that would commit them to action be diminishing in favour of something on emissions. it was the basis for the much less environmentally friendly. Copenhagen accord, a deal that, for the the country is home to the secondfirst time, involved both developed and biggest oil reserves in south america developing countries signing up to limit after venezuelas, and production of their greenhouse gas emissions. substantial reserves of natural gas is Brazil hailed the deal as a breakjust beginning to ramp up. Fossil fuel through; it had already taken a lead companies are looking forward to a in the talks by announcing one of the bonanza. For Brazil, the future may be most ambitious emissions-reduction less green than it has been painted. n targets for a developing country. the

photo: getty

Roads to prosperity
At long last, investment is forthcoming for Brazils infrastructure, with highways, railways and superports set to revolutionise trade. Jonathan Wheatley reports

the new brazil | infrastructure

High demand: a highway in the city of Marlia in the state of So Paulo

per cent discount to the national grid. t is about an hour and this is more than a list of promises. 20 minutes by helicopter from au superport is being built by Eike rio de Janeiro to au, a coastal batista (see page 28), owner of EbX, village in one of the poorest a holding company that controls five areas of rio state. there is not publicly traded operating companies much to see on the way north once you in mining (MMX), oil and gas (oGX), pass bzios, the resort made famous in power generation (MpX), shipbuild 1964 by brigitte bardot when she visi ing (osX) and logistics (LLX). LLX is ted with her boyfriend, brazilian musi building the port complex at a cost of cian bob Zagury. the mountains soon r$4.3bn. MpX will spend us$10bn recede behind a wide, sandy coastal on the power plant; batista hopes to plain, dotted with coconut plantations attract another us$30bn from other and not much else. Green coconuts investors. a dozen companies have sell for 50 centavos ($0.28) each near already committed, including Wuhan au; growers can get more, maybe r$2 iron and steel, Chinas each, if they load up a thirdbiggest steel lorry and drive the five maker, royal dutch hours to rio. but they shell and White may soon be able to A massive concrete Martins, the brazil earn more closer finger, 2.9km long, ian gas company. to home. altogether, LLX has Just beyond au points out into the signed 70 memoranda you can see why: a sea: Au Superport of understanding with massive concrete companies preparing finger, 2.9km long to invest at the complex. and 26.5m wide, points out into the no heavy industry operating in south atlantic. this, when it is ready brazil or thinking of doing so can for operation in 2012, will be the main afford to ignore au, says batista. it pier for au superport, a port and will deliver an industrial revolution. industrial complex oneandahalf the contrast with the old brazil times the size of Manhattan island. could hardly be more striking. down it would be hard to find a more the coast at santos, Latin americas fitting symbol for the new brazil. at sea biggest port, 90 per cent of freight will be 10 deepwater berths for ships arrives by truck and just 10 per cent by carrying oil, coal, iron ore, steel, pig rail. When the Ft visited recently, the iron, granite and other goods; 9,000 streets were strewn with soya beans hectares of land behind the beach are that had bounced off lorries travelling being prepared to receive (among other on poorly paved roads from farms as things) two steel mills, two cement fac far as 2,000km away. tories, an ironore terminal, a thermo today, santos handles about 90m electric power station and a car factory. tonnes of cargo a year more than a the synergies are clear. iron ore will quarter of all brazils foreign trade. arrive on a conveyor belt being built by 2014, it will handle 230m tonnes, by anglo american from its inland with about 70 per cent still arriving by mines in Minas Gerais state. Coal will road. that will put enormous strain on arrive by ship. out to sea are brazils the two coastal highways and on the most productive oil fields, ready to town of santos itself, already congested pump natural gas to the power station with queues of heavy lorries crawling which, as it is on a private complex, through its cobbled streets. can deliver taxfree electricity at a 30
Financial times | 41

photo: GEttY

au is not the only port in brazil holding out the promise of worldclass efficiency: there are plans for a steel mill and oil refinery at the port of pecm in the northeast; an industrial complex is developing at the port of suape, also in the northeast. at sepetiba near rio, the mining group Vale is building an industrial complex centred on a port and steel mill. ut iF suCh proJECts throw the problems of brazils older ports into relief, the outlook for the countrys infrastruc ture is deeply uneven. in electricity generation, for example, vast hydro stations are being built in the amazon basin, often in the teeth of fierce environmental protests. at the same time, brazil has diversified from heavy reliance on hydro power which is cheap and relatively clean, but can run into trouble when rainfall is low by building more thermal plants and investing in other renewable sources such as wind power and biofuels. the electricity sector is widely seen as a successful example of joint public and private enterprise, based on well designed regulation. in water and sew age, by contrast, regulatory uncertainty has stymied progress. although 80 per cent of households have access to clean tap water, just 42 per cent are linked to a sewage system and only 32.5 per cent of sewage is treated. in transport infrastructure widely seen as one of the biggest obstacles to growth in brazil the picture is also uneven. highways, with a few excep tions, are of dismal quality and the government has been reluctant often for ideological reasons, say critics to put them out to concession. brazils rail network is tiny for such a large coun try; new railways have been promised for decades and some are being built, but progress has been painfully slow. in spite of shortcomings, one thing can be said that is very positive for the creation of the new brazil: investment in infrastructure is now at the centre of the political agenda. the rate of investment, while still low, has risen over the past decade and is likely to keep rising. in the past, investment has been sacrificed while the machinery of government has become ever more bloated. this, at last, is changing. For all brazilians, and not only the coconut growers of upstate rio de Janeiro, that is very good news. n

Water problem: only 32.5 per cent of sewage is treated

photo: stiLL piCturEs

Speeding ahead
As profits decline in the US and Europe, Brazils car-making industry is setting new records as its plants run overtime to meet demand. John Reed reports
t General Motors automotive technical centre in so caetano do sul, near so paulo, a group of engineers is studying a cross-section of a car on a screen while conferring with colleagues halfway across the world. the $100m facility, opened last september, is one of just five global product development sites the Us carmaker runs; the others are in Michigan, Germany, south Korea and australia. GMs brazilian engineers regularly discuss products in development with colleagues around the world in rolling conference calls that can run from 6am to late in the evening. alongside GM, also investing in brazilian engineering and design capacity are Fiat, Volkswagen, Ford and psa peugeot citron. increasingly, this means they are developing cars not just conceived, made and sold in brazil and latin america, but also destined for the global market. Were now developing programmes not only for our region but for the globe, says alberto rejman, GMs regional head of product engineering. the increase in research and development and engineering capacity reflects brazils growing weight in an industry whose centre of gravity is shifting from north america and europe to faster-growing emerging markets a long-term industry trend
44 | Financial times

that accelerated during the downturn. last year, as the Us car market shrank to a size last seen in 1982, vehicle sales in brazil grew by 11 per cent to 3.1m, propelled by the countrys resource-led GDp growth, expanding credit and growing middle class. industry analysts believe brazil will overtake Germany as the worlds fourth-largest vehicle market after china, the Us and Japan as early as this year. While most european and Us car plants are working below capacity as the market struggles, many factories in brazil are operating around the clock. Fiats factory near belo horizonte in the state of Minas Gerais, produced 722,400 vehicles last year, second only to VWs mammoth plant in Wolfsburg, Germany, which made 740,000. as the brazilian market sets new sales records, carmakers are reporting bumper profits. Fiat, which does not break even on its carmaking business in europe because of intense competition, earned nearly $1bn after tax in brazil last year, where for the first time it sold more cars than it did in italy. Ford, struggling to return to profitability in the Us for the past decade, reported 25 consecutive quarterly profits in latin america making most of that money in brazil. GM does not break out earnings for its brazilian unit, but in the words of one official it was printing money. like its competitors, GM sees tailored engineering

Bright sparks: workers weld car frames at the GM assembly line in So Caetano do Sul

photo: corbis

th e N e w Br a z il | au to iN d us try

dominated by small, no-frills popuand design as de rigueur for any global lar cars, many with one-litre engines. carmaker worth its name. there are While most are flex-fuel (equipped certain tastes in certain regions, says to run on ethanol), brazil has not been J. holt Ware, exterior design director. a leader in other alternative technoloFrom the late 1960s, GM began gies, such as hybrid or electric cars. and adapting its vehicles suspension and while the country can be proud of its structural reinforcement to cope with home-grown cars, in other regions they the potholes and lombadas (speed would be considered very low-spec. bumps) of brazilian roads. later on, but brazilian drivers are starting to it tweaked cars engineered by opel in demand features such as air conditionGermany to work in brazil: a saloon ing, electric steering and automatic version of the astra and a pick-up transmission. new regulations mean based on its european corsa small car. features such as air bags and anti-lock From about 2000, GM began develbraking systems will become standard oping vehicles in brazil, starting with over the next 3-4 years. the chevrolet celta supermini and consumer behaviour is starting to including the agile small car, launched change, says Fernando trujillo, analyst last october. its technology centre, with csM south america. this will be with more than 2,000 engineers, now good for brazilian production it will designs fully formed chevrolet cars make cars competitive with the world. destined not just for brazil. the big carmakers protected for We have now moved into global years by brazils 35 per cent import programmes and are designing pureduty on cars admit their margins are bred chevrolet products from the getunder threat from growing competigo, says Ware. our skill sets here are tion. that raises the as good as, or better stakes as they expand than, any in the world. their ability to make similarly, Ford cars in and for brazil. employs roughly Last year, as the US While the markets 1,000 engineers at its big four Fiat, VW, development centre in car market shrank GM and Ford conthe northern state of to a size last seen in trol nearly 80 per cent bahia. in april, alan 1982, sales in Brazil of the market, asian Mulally, chief executive carmakers are eroding of Ford, announced grew by 11 per cent their dominance. that it would invest south Koreas hyundai and chinas $4.5bn in brazil in 2011-15 and develop chery automobile both have plans for the ecosport, a compact sUV engibrazilian plants. neered in camaari, bahia, as a global brazilian consumers are becoming vehicle, with projected worldwide sales much better educated, says hau thaiin its different variants of 1.6m by 2014. tang, product development director for For the first time, Ford is designing Ford do brasil. the days of a global product that will be produced manufacturers selling in brazil, says rogelio Golfarb, Ford do last-generation brasils institutional director. this is not products in just a point of pride for the local indusbrazil are try, but also a hard profit calculation. numbered. n carmakers, under intense competitive pressure, must pull together their global operations to remain profitable. no carmaker is developing cars for a single market today, says thomas schmall, president of Volkswagen do brasil. they must be sold and produced in india, africa and asia. the industry now accounts for close to 5 per cent of brazils GDp and more than a 10th of its industrial output. carmakers are predicting continued growth, with at least 20m brazilians having joined the ranks of the middle class in the past decade. brazils market, where high taxes make all cars expensive, was long
46 | Financial times

Loaded: a lorry carrying new GM cars in So Bernardo do Campo

photo: Getty

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