Is Brazil Finally Arriving?

There has been such a deluge of foreshadowing and signs of real economic improvement in Brazil for so many months now. But the culmination of a series of events which climaxed on April 30th actually provoked surprise here and abroad about the strides Brazil has made, and the opportunities now in its grasp.

It all emerged from the general climate of economic improvement across most indicators in Brazil. Inflation, once a rival of the old military dictatorship in terms of terrorizing the public, has been tamed. Credit is expanding, from the emergence of a nascent consumer mortgage market to the growth of microcredit even in the poorest communities. Domestic consumer spending is growing, as are wages. Poverty is easing. And for the first time (as featured on the cover of Veja magazine earlier in April), the middle class is now the largest socio-economic segment of Brazilian economy. No one alive can remember when, or if, that has happened before.

Brazil can no longer be credibly called a "poor country."

The big drama, however, started with events across the River Plate in Buenos Aires. This longtime rival of Brazil in all matters of prestige, football and economics has been teetering on the verge of a new economic and political crisis. President Cristina Kirchner, who only last October romped to a huge election victory, has taken a swandive of George W. Bush proportions in approval ratings. She's shown herself to be cut from the same incompetent Peronist cloth as her husband and predecessor, pursuing an increasingly bewildering set of economic policies that could turn an impressive economic expansion into a disastrous new collapse in a matter of months.

In the shadow of Argentina's sinking fortunes, shackled to the stereotypical South American political blunders of the past, Brazil's new shine seems all the more modern and brilliant. And on Friday, April 25th, the worm turned.

Argentine Economy Minister Martín Lousteau, a 38 year-old moptop that the Kirchners thought they could easily control, resigned. He'd proven to be too sensible, too insistent and too alarmed by the madness of the government's policies around spiraling inflation and disappearing investors. This sent markets in Buenos Aires into a tailspin of despair. Argentina was already worn out from a violent political showdown between Cristina and the farming sector over massive increases in export taxes to feed the government's unnecessarily swelling budget. Middle-class protesters had returned to the streets of the capital to bang pots and pans, side with the farmers and denounce the government - and they'd been met with club-swinging thugs of the Kirchner's Peronist machine in the Plaza de Mayo. With Lousteau's abrupt resignation, after arguing for an anti-inflation plan that curtailed government spending that was rejected by the Kirchners, all hope seemed to be lost for Argentina.

And dollars began to disappear in Argentina. Investors fled in all directions, and citizens of the capital made a run on banks to buy the greenback in such numbers that most of Buenos Aires' banks ran out of the currency by the end of the day.

Brazil, meanwhile, was in the midst of yet another discovery of oil reserves in its off-shore territory. The only question was how big it was. But it seemed clear that the master of world biofuels would now likely become an oil exporter of the first degree in the coming decade. The Bovespa stock market was rocketing.

Finally, on April 30th, Argentina got a roundhouse punch to the jaw, and Brazil was suddenly the winner of one of the most important beauty contests in the world economy. All on the same day.

In the morning, a U.S. federal judge ruled that several billion dollars in Argentine bonds held abroad would be frozen, and the country would be forced to open its public account books to scrutiny in court, in a suit arising from its last economic meltdown in 2001. This level of scrutiny is something the Kirchners have adamantly refused from the IMF and other organizations in relation to the massive default in the previous crisis. To refuse it now to this court would amount to a default of a legal kind, which could open the country to even more embargoes and sanctions until it settles its outstanding debt in default of some US$25 billion, at a time when it can't even handle the debt it has emitted since. Plus, the farmers may return to the barricades any day now, and average Argentines are frightened about the future.

But in the late afternoon, on the eve of the May 1 holiday, Standard & Poor's shocked the financial markets and granted investment grade status to Brazil, long before it was expected. It is the first time in history Brazil has earned this rating, and Estado de São Paulo estimates it will result in US$3 trillion in new investment pouring into the country. That's three times the current size of Brazil's entire GDP. The contrast with the deepening doldrums next door could not have been more electric.

This big stew of news, emotion, pride and schadenfreude hasn't really sunk in yet here. When you've never tasted the best wine, how can you tell how good it is on the first sip? Most Brazilians alive today are from generations that either survived the worst of hyperinflation, military governments and grinding poverty, or are their children and were raised with a sense of deep cynicism rather than hope. It's hard to blame them. But this is a big country, full of many different kinds of people. There is also a nucleus of dogged, determined entrepreneurs and optimists here. They are clever, educated, proud and ready to compete. And many Brazilians who'd gone abroad -- legally or otherwise -- are coming home, retreating from the downturn in the U.S. economy, or the growing restrictions on their movements there or in Europe. They are not only finding a better situation here than when they left, but they are bringing back a wealth of real-world experience, language skills, and a realization that the world is bigger than they'd thought, and they can handle it.

I can feel it changing. My maid talks about shopping. The doormen wear good shoes and jackets. Stores are opening all over the place, and there still seems to not be enough of them to satisfy the crowds of people in them. Apartment buildings are going up at a rate of one every day, according to today's O Globo. The number of people knocking on car windows at stoplights, either to beg or to sell small things, is shrinking. And the yields I'm seeing on basic, money market investments linked to my very basic consumer bank account are astounding. One higher-risk fund has already produced a 20% yield since January, while the lowest-risk fund is posting 2% a month. It is unmistakable what is happening here.

So, while the distribution of wealth in this country is still among the worst in the world, it seems that market economics, matched with fairly sound monetary policies, may finally have a chance to do its work in correcting it. No heavy-handed, politically-tainted intervention by a Chavista/Peronist regime. Just real development. The challenge now is whether the Brazilian government realizes they must pass a package of tax reforms to ensure the flood of new investment dollars coming in actually spread across the economy more cleanly, and don't end up in the same pockets of the same mega-rich few they always did before. We'll see.