Political Corruption, the World Cup and Rising Prices: Welcome to the ‘New’ Brazil

By Emma Black 20 June 2013

In 2001, Jim O’Neill of Goldman Sachs announced the BRIC economies as the markets of the future. Brazil, Russia, India and China were positioned as holding the strongest potential for achieving sustained economic growth. Since 2001, China has become the second-largest world superpower following continued investment and manufacturing, that has led to strong import demands for commodities such as oil and iron ore. Because of this demand, the Brazilian economy roared to life. Chinese demand for Brazilian natural resources, such as iron ore, led to large gains for producers such as Vale and Petrobas, while investment from the west in search of high-beta led to a soaring macroeconomic environment.

The economic success enjoyed during these years allowed President Lula da Silva to become arguably the most popular president that has ever been seen in Latin America. His eight-year run, perhaps made easy due to favourable market conditions, led to job creation and rising family incomes. Unemployment was close to historically low levels, with wages rising comfortably ahead of inflation. This resulted in a growing middle class and falling inequality across the country. Furthermore, Embrapa – one of Brazil’s leading firms pioneering technological advancement in the agricultural sector – developed useful technology in relation to rotation techniques and ‘no-till’ farming that has used biotechnology from the US to push Brazilian soyabean production slightly ahead of the US.

Over the last six months however, we have seen that the tide has started turning. The cool down in Chinese growth - following a governmental regime shift to move the second-largest world superpower from an export-dependent to consumer-driven economy - is having repercussions worldwide, and a fall in the global demand for commodities has burst the Brazilian bubble. The advancements of some sectors by companies such as Embrapa are also persistently not following through to real success for the economy as poor infrastructure is leading to the loss of orders through shipping delays and rising transportation costs.

The development of infrastructure was sold to the public as one of the key benefits of Brazil securing the rights to host a series of mega sporting events through inward investment and global exposure. At the time, this had a marked impact on sentiment with a positive outlook for the future of Brazil. But now, as Standard and Poors have cut their outlook for the Brazilian economy, tough times have reared their head once more. The investment promised to be spent on building infrastructure for the economic growth of Brazil, is instead being spent on stadiums to seat up to 70,000. In Manaus, a stadium with a capacity to seat 43,000 has only an average attendance to professional games of around 600 fans. This is true in Brasilia and Mané Garrincha as well. The authorities have admitted that they are well over budget and that there are significant challenges being faced to complete in time.

And this week, the people have revolted. The Brazilian political dream to assume an international foothold is rendering a difficult reality for the country’s inhabitants. In a surprising convulsion, protesters have attacked the government for misuse of public resources on glittering sports stadiums, when education and healthcare provisions remain inadequate. A hike in bus fares was the catalyst that has led to a national movement protesting against widespread rising prices that are perceived as a result of political corruption and excessive government spending in the wrong areas. The once celebrated victories of securing the Confederations Cup, FIFA World Cup and the Olympics, are now being viewed as the root of much inequality and hardship. Investment into hosting the World Cup is massively outweighing investment into healthcare and education, and those, coupled with improved infrastructure, are the real drivers of the economic growth moving forward. Inflation problems have resurfaced while economic growth is now growing at its slowest rate for over a decade. The sluggish economy and outflow of funds following drops in the demand for global commodities have had a dire impact on sentiment within the country and the hike in bus fares appears to have been the final straw for a dissatisfied Brazilian public. Circa 215,000 people expressed their dissatisfaction with Dilma Rousseff’s government, marching across eleven cities in one of the largest public demonstrations seen since the collapse of the Brazilian dictatorship at 1985.

The promised infrastructure development for improved transportation links is also being questioned. Authorities are arguing that while the stadium in Manaus may indeed be under-utilised, they are also stating that investment for the World Cup has also led to 5bn reals being spent on upgrading the local airport, developing better connections with the national grid, establishing a 4G network and improving transport. The government claims that by hosting games in the North, inequality will be reduced. Romário claims different – the footballing star turned MP has stated that it is unlikely these stadiums will be used for long after the World Cup. Moreover, favouritism for specific companies and managers has also been an accusation lobbied at MPs. The World Cup gains look set to be extracted mainly by FIFA through potentially record-high sponsorship and broadcasting rights while Brazilian taxpayers are left to pick up the bill.

Time will tell as to whether or not the most successful World Cup team to-date will complete the transition to become an economic winner as well.