The Promise and Perils of Growth: Brazil's Improving Poor and Stressed Middle Class

Today I direct your attention to an excellent article from the Financial Times (whose pay wall seems to allow access) about the affect that growth has had on Brazil's middle class.  Last fall I wrote about the dizzying sensation of coming from an economy that is in the depths of a deep recession to an emerging economy in the midst of a economic boom as I traveled to São Paulo.  Economic boom sounds like it should be great for all, but it does put pressure on prices which hurts if your income is not rising as fast.

But Brazil, which has long been one of the most unequal countries on earth, has finally seen real progress in raising people out of poverty and lowering inequality (thought the very wealthy have done very well too) for example the Gini index has fallen from over .6 in the late eighties to almost .52 today. So growth overall has been very good for the country and its poor, but it does have many subtle consequences.

Here is an excerpt from the FT article:

Speaking to Melissa Beeby, you would not know that Brazil is enjoying its most prosperous period since the “economic miracle” of the late 1960s – as the country’s last great boom is known.

Like other members of Brazil’s so-called “traditional” middle class, things have become harder for Ms Beeby in recent years. The prices of meat and petrol have doubled, highway tolls have risen and eating out or buying property have become prohibitively expensive.

“The middle class basically is in debt. That’s how people manage,” says Ms Beeby, who runs the Bridge Restaurant at the British Centre in São Paulo. “People have more dinners at home and when they do go out, they go to simpler places.”

The story of Brazil’s success in lifting millions of people out of poverty over the past decade has really been a tale of two middle classes.

While headline economic growth has not been as spectacular in Brazil as in China and India, at an average of about 4 per cent a year between 2003 and 2010, the balance of income distribution has improved more rapidly in Latin America’s largest economy than in the other large emerging markets.

In Brazil, mean household income since 2003 rose by 1.8 percentage points a year above the rate of gross domestic product growth, helped by generous increases in the minimum wage and welfare handouts. In China, by contrast, the rise in household income trailed GDP growth by 2 percentage points a year.

On the winning side have been an estimated 33m people who since 2003 have risen to the ranks of the so-called “new middle classes” or above. Today, 105.5m Brazilians out of a total population of 190m are members of this group, who earn between R$1,200 ($767) and R$5,174 per household. Also better off are the rich, who have profited from a stock market, commodities export and consumption boom.

On the losing side, say sociologists, are the 20m or so people of the “traditional” middle classes who earn more than R$5,174 per household. Unlike in India, where the old middle class benefited from the creation of new industries, such as information technology outsourcing, many in the Brazilian middle class complain of rising prices, taxes, congested infrastructure and increased competition for jobs.

I encourage you to read the rest at the FT and a related article at the Newsweek site.

Self-Enforcing Mechanisms

I am, for the second year in a row, felled by a nasty sinus infection.  So blogging from bed this morning and I can think of anything to write about save for another tale from Brazil.

In Brazil these days the federal government has a system that will refund to consumers part of the VAT tax they pay on purchases of consumer goods.  In order to claim the refund, you have to give the equivalent of your Social Security number to the cashier every time you check out.  These purchases get recorded in a central computer system and the government keeps a running tally for every citizen, which you can log in and check. [This is all, by the way, as I understand it and was explained to me - details might be a bit off]

Why, you might reasonably ask, doesn't the government just lower the VAT, or just have the retailer award the refund on the spot?  Because this system creates a natural enforcement system which compels the retailers to report all sales to the government and pay the appropriate tax, part of which gets refunded to the customers.  Failing to do so will cause a great kerfuffle among customers that find that a purchase was not recorded.

Pretty clever.  Of course this system only works in a modern age where computers and the internet are common.

On a side note, I was very proud of my nascent Portuguese last time I was there and would march up to the cashier of a store ready for whatever they said: "did you find everything you were looking for?", "is this all for you today?", do you want to pay in cash or credit?", "how are you today?"  Whatever.  Of course, every time I was dumbfounded by a quick question that was entirely incomprehensible to me.   So I had to mutter "er, I speak Portuguese badly and I didn't understand."  Of course what they were asking me for was my national tax number.  Brazilians are the most wonderful people though and rather than being nasty about my failures in their native tongue (ala the French, whose tongue I master pretty well, but still get snide attitude from Parisian shopkeepers), they are incredibly accommodating and delighted that you try.

My favorite story was from a bookstore where I, once again, forgot about the tax thingy and was dumbstruck at the question.  The cashier immediately apologized for embarrassing me and apologized that his English (which was great) was not so good.  I apologized that my Portuguese (which is poor) was poor and he said that, no Portuguese is too hard to learn and I shouldn't be expected to speak it in Brazil.  Too funny.  The reality is it is not very hard except for making the nasal sounds and it is a beautiful language that is super fun to speak because of all the wonderfully exaggerated intonation.

If I were not so sick I'd look the tax thing up and do a little real research on it, but I am too tired.  Comment with links if any of you are so motivated.

A Tale of Two Hemispheres

Dilma Rousseff.  |  Photo credit: BBC

The USA, the world's economic engine struggles to find a way out of the deep, deep recession.  Meanwhile down in the hemisphere, Brazil has an entirely different problem: how to escape the slings and arrows of outrageous fortune. When I was there in December is was like the world had turned topsy-turvy, the US was in the doldrums and Brazil was positively humming - strong growth, full employment and (predictably) struggling to contain inflation.

My Dilma had just been elected and my economist friends were withholding judgment beacuse they just didn't know what to expect. They were troubled by signs that she may threaten central bank independence and block a move to increase interest rates in an effort to put the breaks in inflation fearing that higher interest rates would be unpopular with the working class - her main constituents.  I imagine they are all feeling a little reassured as the central bank has just announced an interest rate hike.

The BBC has the skinny:

Brazil's central bank has raised its key interest rate to 11.25% in a bid to cool inflation in one of the world's fastest growing economies.

The rise, from 10.75%, is the first under President Dilma Rousseff and central bank head Alexandre Tombini, both of whom took office this month.

Inflation was 5.91% last year and is forecast to remain above 5% in 2011.

But the rate rise risks sucking in foreign money, adding to pressure on the already overvalued Brazilian real.

The central bank warned that the rate hike may be just the start of a series of rises to curb inflation.

Capital inflows from outside Brazil have soared as investors flee record-low rates in more developed countries.

The strengthening of the real has hit Brazil's manufacturers hard because their exports have become more expensive.

But Brazil needs to do more to rein in a massive consumer credit boom which has helped fuel the economy's rapid growth.

The economy, Latin America's largest, grew more than 7% in 2010 and is expected to grow between 4.5% and 5% this year.

Other anti-inflation measures have included a big increase in banks' reserve requirements to hold back lending.

Think about how estraordinary this is given where we are as a country. Our central bank has had interest rates at essentially zero for well over a year now and we worry about deflation, while Brazil is booming so much that they are worried about too much inflation.  11.25% prime interest rate?!?  Wow.  And this is not at all the old Latin American story of too loose a monetary policy to appease the masses which lets inflation get out of hand, this is pure old fashioned economic growth.

The exchange rate problem is a serious worry however, and one with no easy answer.  When I was in Brazil in 2008, the a Dollar bought 3.5 Reals, last December I got 1.5 Reals form my Dollar and boy did it hurt.  Everything was expensive in Sao Paulo (already a very expensive city) and I had to think hard before I spend my money.  This is the same for the stuff Brazil exports - foreign buyers will find it more and more expensive and will cut back or cease to buy at all.  Brazil is worried and for good reason - they don't have the Chinese ability to keep the exchange rate artificially low.  So a natural brake on Brazil's growth is going to happen, but Brazil will still be doing a lot better than the US.  Parabens!

In Brazil

Silvia Izquierdo/Associated Press

I am in Brazil in part to attend and present at a conference on education.  I am learning a lot, including some misperceptions about what we know about some aspects of education reform.  I hope to blog about this this week.

In the meantime all the talk has been about the military take over of a favela in Rio.  Interestingly, the tactic (apparently the blueprint is Medellin in Colombia) is the same as the US in Iraq and Afghanistan: clear, hold and build.  The idea is to clear out the gangs and drug dealers, create permanent (or long-term) police stations and then build relationships through providing community services like health clinics.  These favela are almost stateless places within Brazil, ungoverned by the state but governed by criminal gangs.  Interesting.

Ironically, the very best real estate in Rio aside from beachfront property belongs to the favelas.  The city prohibited official building up the hillsides to preserve the natural environment but had insufficient resources to deal with the illegal building that eventually became essentially permanent neighborhoods: slums with million dollar views.  Ah Brazil.

Not to gloat, but the São Paulo weather has been fabulous: sunny and in the 70s (okay, yes, to gloat).  The last two days have seen tremendous tropical rain storms that last about 30 minutes but absolutely drench the city (including me today).  Here is a picture of the sun to warm yourself by taken from my apartment balcony.  No I am not rich - the research center provides the apartment.

Unlike last time I was here when a dollar bought about 3.5 Reais, the exchange rate is down to 1.6 and São Paulo is EXPENSIVE!  My meal last night with two beers and plate of Picadinho was $60!  Ouch.

Ciao.

Economist's Notebook: Random Thoughts from Brazil

Some random thoughts I never had a chance or the will to turn in to full posts:

1. GM has a HUGE presence in Brazil, all under the Chevy brand, though almost all the cars they sell are European designed Opels (the German car company which is owned by GM). Unlike most of the crap sold as Chevys here (and mostly fleet sales and to rental car agencies it seems), these cars are relatively stylish and well engineered. One wonders why US auto makers are so content to make great cars for Europe but bound and determined that US consumers won't like them and instead sell their crap to us. GM has awoken to this and has now transformed Saturn into basically Opel USA to widespread acclaim in the auto press. It is time for these companies to consolidate and start leveraging their European designs. But the Latin American presence of Chevy is a very good thing for the future of GM (if there is to be one). Time to jettison all of the other brands in the US and just be Chevy.

2. VW has the biggest presence in Brazil dating back to the days of the Bug and the Combi (which is still made and very common in Brazil - making me wistful for my old bus). Fiat is relatively new, I'm told but now huge as well and the french companies are pretty big. But Japanese and Korean cars are not - they are just now trying to break in. This is curious given the fact that the largest Japanese ethnic community outside of Japan is in Brazil.

3. Brazil is a huge and amazingly diverse country and the three places I have spent time, Salvador, Sao Paulo and Rio are as diverse as California, New York City and Florida (in that order). You just can;t generalize too much about the county from a visit to any one place, and there is still the huge interior agricultural and ranching regions and the Amazon - it is a truly wonderful and wonderfully diverse country.

4. I was told by residents of Rio that though one often takes the admonitions to tourists to be careful in Rio lightly (must be an overabundance of caution one is apt to think), on the contrary, Rio is VERY dangerous and you have to be VERY careful. Hard to imagine living that way and one wonders why it is so hard to fix. A big clue lies in the fact that Brazil is a fairly rich country but one of the most unequal on earth.

5. Sao Paulo has got to be on par with NYC, Paris and London as world class dining spots. Yes, I said London - been there recently?

6. What do you do when land is enormously expensive but labor is relatively cheap? Well in one trendy Sao Paulo neighborhood, a new supermarket decided not to build a parking lot, but offer free delivery to your home.

7. A draft beer is called a "Chopp" and good luck finding anything but pilsners. I did try a Brazilian wine, but Brazil has a long way to go to catch up to the Argentinians and, especially, the Chileans.

Economist's Notebook: From the Southern Hemisphere

Greetings from Sao Paulo. Two interesting snippets from yesterdays O Estado do Sao Paulo (one of the Sao Paulo daily newspapers).

First this for my students of international economics and money and banking:

Luckily for me, the US Dollar has appreciated against the Real considerably - making my stay here much cheaper. Each of my dollars buys more stuff here than it did a few months ago. For example the 50 Reais meal I had yesterday would have cost me $31 at the beginning of September and now costs me about $21. Here is the Dollar-Real exchange rate history for the last three months:



This appreciation of the Dollar is bad for US exporters to Brazil, because now the same goods are more expensive to a Brazilian. It should be good for Brazilian exporters for the opposite reason. But much of Brazil's trade is in primary products (65% of the total value of Brazil's exports according to the article below) and while the Real has been depreciating, the worldwide economic crisis has caused commodities prices to plummet. So Brazil is hurting, here is the banner headline from the Sunday paper:

Crise em países ricos e queda de preços abalam exportação
Valor de matérias-primas, que lideram venda externa, caiu 42% desde julho

By the way, currency depreciations for developing countries are usually bad news if they have dollar denominated debt (which many do), but defending currencies is usually an expensive and risky game.  This, however, is a topic for another time.  

A couple of side notes. I was amused that the newspaper headline called the economic crisis a "crisis in rich countries," this is true, the banking crisis did originate in the US and Western Europe, but, as is noted by this article, the crisis will affect everyone. It is also amusing that they would use the term rich countries as we are so careful to use euphemisms like "developing countries" instead of "poor countries."

Second, as a soccer fan I was very interested to see an article on the latest hot youth bands in Sao Paulo include pictures of two very hip new and hot bands wherein one member of each band was wearing a soccer jersey from the US's Major League Soccer. For those that wonder what non-pecuniary benefits an MLS team might have for Portland, here it is - worldwide exposure. And, by the way, this is why I think MLS is a good long term investment for the Mssrs. Paulson - entering into a global sports marketplace in a way that even the NBA does not have a prayer to match has got to be a good bet.

On the Road: Brazil

I am off to Brazil for a conference in Rio where I am presenting some research and from there I am off to do research in Sao Paulo.  I will be in Brazil for most of two weeks (missing my favorite but uniquely American holiday).  Though this is the OREGON Economics Blog, one of the current themes running around my head these days is how much are fortunes are all intertwined, so posting about Brazil, development, etc., I think is fair game.  Besides, it's my blog, I make the rules.  So, I'll report next time from Ipanema beach in Rio.

Ciao!