Brazil - Country of the Future?

So I thought I would take a quick break from blogging about my work to talk a bit about some of my personal thoughts about the Brazilian economy. I certainly don't consider any of this to be definitive analysis as I have not been researching this much here or looked at detailed statistics. I have been reading lots of articles though, and been trying to make sense of all the information coming at me. So this post is basically about my impressions so far.

The Brazilian economy has certainly been on a roll for the last decade or so, and the excitement is palpable here. Even outside of the country, Brazil has been making a name for itself as a new "it" country. With lots of positive international media coverage (is anyone else getting sick of the word BRIC?) glowing about strong growth rates, rising investment and new government programs designed to cut poverty, along with a more robust, outward-focused foreign policy, the common assumption is that Brazil is a country of the future.

While the successes of the last few years and the contagious optimism should not be ignored, I think a few words of caution are in order. After all, this is not the first time that people expected Brazil to catapult onto the world stage. A famous saying here is, "Brazil is the country of the future, and it always will be." This nation has so many advantages - an agreeable climate, rich natural resources, a history of industrialization, a young, diverse population, etc, that it is hard to imagine why it wouldn't be successful. But historically, like most of Latin America, it has been subject to numerous boom and bust periods that tend to ebb and flow based on commodity prices. Is this time different? It seems to me like a mixed bag.

In a recent report, the Council on Foreign Relations identified four pillars of future Brazilian economic growth: agriculture, extraction (mining), energy (offshore oil), and domestic consumption. Note that three out of those four sectors are exports of primary goods. This means that Brazil is really continuing to do what it has always done: export its natural resources and hope that market prices are good. For now, the signs are that market prices are indeed quite promising: surging demand from China (and now India) has driven prices for soy, ore, and oil way, way up for a prolonged period of time. For now, that demand shows no signs of abating, and some economists have talked of a "supercycle" in commodity prices. This has really been the main motor of Brazil's growth over the last decade. As China and India continue to boom, so boom the countries that send them raw materials. Brazil's economic future is thus inexorably linked to its trade with these two countries. This is hardly a recipe for dynamic economic development.

With demand from the East looking strong at least for the near future, Brazil has a unique opportunity to leverage the extra income it is getting from high commodity prices to really transform its economy. Domestic demand has indeed risen, and millions of Brazilians are growing out of poverty and causing a consumer boom (though one that is starting to resemble a dangerous consumer bubble). Bolsa Familia, the largest conditional-cash transfer program in the world, has also helped reduce extreme poverty in the rural interior. The government has announced lots of new investment aimed at combating poverty and promoting infrastructure, health, and education. These are all efforts that should be celebrated, and nothing to be taken lightly. But ultimately, these gains will be fleeting if they do not translate into a new, more dynamic model of economic growth. As soon as commodity prices crash and everyone comes back down to Earth, government investment will dry up and the consumer bubble (especially in real estate) will pop. And then Brazil will be back to square one. This is a story all too common in Latin American history.

The key is not to get complacent. There is a lot that can be done to put Brazil on a more stable economic footing over the long term. The education system needs to be drastically improved. This is not simply a question of throwing more money at the issue, it is about structural reform to improve the quality of teaching and education. As in the U.S., it is not a simple issue, but that does not mean it can be put on the back burner. The public primary education system is terrible, and the differences between public and private education exacerbate the deep societal inequalities that are part of everyday life here.

Corruption is also deeply endemic, from the national level on down to local municipal governments. The recent number of corruption scandals in Dilma's cabinet serves to prove this point. When times are good and the government is flush with cash, people have extra incentives to pocket money for themselves. If Brazil does not make an intense effort to tackle this problem head on, it is going to have a difficult time improving its governance.

A perverse tax regime that protects special interests is another huge problem for Brazil. As I mentioned in a previous post, interstate transportation taxes are mindbogglingly high, which prevents integration of industry across the country. Import taxes designed to protect domestic manufactures make many consumer goods as well as input materials prohibitively expensive. Brazil is the most expensive country in the world for buying a car, not because production costs are so high (the country has a long history of car manufacturing) but rather because of stratospheric taxes. All this money then flows to the government, which uses a good chunk of it to pay very generous salaries and benefits to well-connected government employees. When in Brasilia, everyone I talked to said they hoped to work for the government because they would make so much more money. While I have nothing against rewarding government employees for good work (my parents both have worked for the federal government, after all), the corrupt "who-you-know" patronage system means that privileged insiders are essentially able to reap huge monetary benefits from a government tax structure that hurts the lower classes and creates a huge drag on economic growth.

Overall though, the biggest issue I see is this. Successful capitalist economies have historically depended on one key sector to sustain their development: manufacturing. In fact, if you trace the history of large-scale manufacturing throughout the world, from England to the U.S. North and later to the U.S. South, followed by Western Europe and then East Asia to present-day China, you can see a nice path of the most economically dynamic areas over the last 150 years. In the U.S., the steady eroding of our manufacturing sector due to mechanization and outsourcing has caused a crisis in our middle class, temporarily masked over the last several decades by several credit bubbles, but now painfully laid bare during the current recession. Brazil, and Latin America in general, have largely been bypassed by this process. As great raw material exporters to the manufacturing titans, their success has gone up and down as newly industrialized countries go through rapid growth periods and then peter out. If Brazil and its neighbors want to take their place among the industrialized countries of the world, they cannot continue to play this secondary role. They must become manufacturing titans themselves.

For now, industry in Brazil is heavily concentrated in São Paulo, easily the most economically dynamic region of the country. While the poor North-east of Brazil has experienced strong growth recently, this has reflected mainly new routes for raw material exports, not new industrial manufacturing strength. The strong real has hurt Brazilian manufacturing recently, and a new industrial policy will help to cushion the blow for domestic producers. But ultimately, this is not a new policy to promote dynamic manufacturing growth but rather a continuation of benefits to domestic special interests (not unlike the failed Import Substitution Industrialization wave of the 60s and 70s). Until Brazil finds new dynamic engines for future growth, principally in manufacturing, I would be cautious about getting too optimistic. I guess we will all see what happens, but it seems to me like history may be about to repeat itself here in the perpetual country of the future.

Wasteland (Lixo Extraordinário)

For those of you who are not familiar with this movie, Wasteland is a documentary that came out a year ago about a project by Vik Muniz, a famous Brazilian artist from São Paulo. In this film, Vik goes to Jardim Gramacho in Rio de Janeiro, one of the largest open air dumps in the world, to work with a group of catadores who make their living picking recyclable out of the dump. The movie is very beautifully done and does as an incredible job showing the personal stories of this amazing group of people who manage to survive and thrive in what are truly some of the most abhorrent conditions of poverty that you can imagine. I hope that those of you who take the time to watch it enjoy!


Wasteland - Lixo Extraordinário

São Roberto Factory Visit - Researching the Recycling Industry

Last week, I visited the São Roberto cardboard factory in Santa Luzia, right outside of Belo Horizonte. Together with a group from UFMG, we are researching the supply chain of paper and plastic recyclables. Although the recycling market is in fact quite huge (big business all over the world), it is in a lot of ways relatively unknown. Our goal in this project is to gain a better understanding of the recycling market so that we can better help the cooperatives of catadores to tailor their production to the demands of industry.

São Roberto produces their cardboard almost entirely from recycled paper, so this visit was very interesting for me to learn about the recycling process in general and better understand the economics of the recycling industry. I won't go into details here, but I was really struck by the fact that the input materials for the entire process were loads of pressed cardboard and paper completely identical to those produced by the cooperatives I visited. Although our tour guide explained that the goal was for the material to be as clean as possible upon arrival, he also explained that they used many advanced mechanical and chemical processes to clean the paper pulp and impurities were thus rarely an issue. That is to say, even paper and cardboard that appears somewhat dirty can be sold to industry.

The visit revealed to me how little is actually separating the catadores from industry. It really isn't a question of adding more value to the product (at least as far as paper is concerned). The middlemen clearly do very little other than collect material from the catadores for a dirt cheap price, press it, and sell it to industry at a significantly marked up value. (That is why we call them middlemen, after all!) The catador does all the work of collecting and sorting the material, and yet the middlemen take all the profit.

Instead of adding value to the material, the key for catadores to sell directly to industry is simply to increase scale. Our tour guide explained to us that they only buy their input materials from the large middlemen because they have a very large demand and need to buy materials in bulk and make sure that their suppliers will be reliable. The smallest supplier to the factory provides around 80 tons of cardboard per month. This gives me hope for the future of the commercialization networks - if we start by focusing on the areas that demand greater scale and less value added, we might be able to capture more of the profit within the market, and then we can later expand into more intense value-added areas such as plastic processing. With the infrastructure and equipment that cooperatives and networks can provide, there is little reason for middlemen to exist within the recycling market at all.

One interesting side note: our tour guide mentioned that they only buy materials from within the state of Minas due to high taxes on interstate transport. At the State Conference, an aluminum industry representative complained of the same problem. I will go into further detail in a later post about the Brazilian economy in general, but I find this to be a fascinating example of the complex tax regime in this country that undermines efficient economic production and further concentrates manufacturing in individual, separate clusters rather than a nationally integrated economy.

Are Cooperatives Economically Beneficial for Catadores?

Whenever we talk about an economic development project that targets a specific group of low-income people, one of the most obvious questions to ask is: will this initiative make these people better off financially? In the case of the catadores, most people tend to assume that cooperative organizations will bring a clear economic benefit, given that large groups of people working together can demand a higher price for their product. However, the real story is a bit more complicated.

In January, the State Waste and Citizenship Forum of Minas Gerais published the results of a year-long study of catadores and recycling systems across the state. Data in this study revealed a fact that many may find surprising at first: catadores tend to make more money working in dumps than in cooperatives. Whereas only 11.1% of organized catadores reported a monthly income of at least R$466 (US$290), 25.6% of catadores in dumps reported at least this amount. (By comparison, only 9.7% of catadores in the street reported this amount.)

This makes sense if you think about it intuitively. In the dumps, material is plentiful. Walking around within a few square feet you are likely to find a good number of cans. If you work for long enough hours (and the same study showed that catadores in dumps tend to work significantly longer on a daily basis), then you are likely to make a greater income. But at the same time the drawbacks are significant: smell, hygiene, risk of cuts and/or infections, animals, social stigma, etc. Child labor also tends to be more common in the dumps, as parents recruit their children to help them pick through the material.

But even with these drawbacks, catadores are often reluctant to leave the dumps. Why abandon something straightforward and profitable to face the uncertainty of joining a new organization? In fact, many of the cooperatives I work with began not out of a sudden desire from the catadores to organize themselves, but rather due to external pressure. In the case of ASCAP in Nova Lima, the association only began when the municipal authorities closed the dump and the catadores had no choice but to search for alternatives. In fact, one of the leaders of ASCAP, Leo, explained that for a long time he made much less money in the association than he used to in the dump. ASMARE, the 200-person strong association in Belo Horizonte, was only formed after the local police repeatedly harassed homeless catadores sorting material on the street behind the bus station. Although many of the catadores of these groups are now glad to be part of an organization, they admit that it was an imposition that they resented at first.

This is a struggle we still deal with on a regular basis here. The more established organizations now offer fairly decent salaries that can even compete with the formal market (when times are good associates can make several times the minimum wage). But the associations struggling to solidify their operations also face difficulties in providing strong economic incentives for their members to stay on. And even though we may think of the organization as a more stable form of employment, the truth is that the cooperatives can go through huge boom and bust periods depending on market prices, private donations of recyclables, government contracts, etc. In a lot of ways, life in the dump is much more reliable and safe.

All in all, I think it’s pretty safe to say that the catadores are better off working in organizations than in the streets or in dumps. But the economic incentive is not always on our side, especially when dealing with new organizations, and this makes our work that much more difficult. In the long term, through circumventing the middlemen and selling higher up in the supply chain, we should be able to provide better income for the catadores that make up part of the CATAUNIDOS network. But this is still a work in progress.

ITAURB - An Alternative Recycling Model

Two weeks ago, I went with the UFMG team to Itabira, a mining town a few hours outside of BH. The goal of our visit was to look at the recycling model being implemented in the municipality by an organization called ITAURB.

ITAURB is classified in Brazilian legal terms as an "autarky." Fellow history nerds may find the term familiar from the WWII era. Broadly meaning "self-sufficient," the word was often used in Nazi Germany to describe Hitler's goal of creating an international empire that had complete control over all the resources it needed for long-term economic growth, thus eliminating the need to trade with the outside world. In Brazilian legal jargon, autarky is used to describe a somewhat self-sufficient decentralized government enterprise. The municipal government creates an entity to handle a specific function (urban cleaning, for example), and then that entity establishes an administrative structure and functions independently, although still under ultimate jurisdiction of the state. ITAURB is responsible for Itabira's urban cleaning, which covers trash collection and disposal, recycling programs, street sweeping, and weeding/gardening.

Our site visit took place at ITAURB's recycling sorting center. We toured the area with one of the supervisors to learn about their business model, sorting process, and architectural layout. Overall, the model was very similar to that used by the cooperatives. Material is separated at the source by local residents and businesses and then picked up and taken to the recycling center ("selective collection" is the common term for this activity). As at Coopert, the material is unloaded at a silo, where it is pushed through a chute onto a conveyor belt, where workers sort out the material. The materials are then pressed and stored in a separate area. ITAURB also had a "fine sorting" area where materials were further sorted by hand into more specific types (ex: milk-based PEAD plastic vs. soap-based PEAD plastic).

It was hard not to be impressed by the efficiency of the ITAURB operation. The space was very clean and well-organized, and the finished products seemed to be of higher quality (more precise sorting, less dirty). According to information we received during the tour (still unconfirmed), the ITAURB program not only covers nearly the entire population and achieves a very low rejection rate for the material it collects, it also is able to sell its products directly to industry and thus receive better prices. All in all, I found it hard not to make comparisons with the apparent chaos of some of the warehouses of catadores and wonder if this sort of recycling model would be more replicable on a larger scale (and thus more able to achieve its environmental goals). Compared to the confusion and instability of the cooperatives, I was reminded of the allure of the efficient, hierarchical capitalist business model.

At the same time, however, I reminded myself that ITAURB and the organizations of catadores do not share the same ultimate goal. Although the autarky does make an effort to employ people from low-income communities in its operations, the principal focus is on urban cleaning and not on social inclusion. The catadores, on the other hand, care first and foremost about providing opportunities for marginalized people to participate in society and earn a basic income, and the fact that they are promoting environmentalism is a side benefit. Comparing autarkies and cooperatives side by side, I was once again reminded that our environmental and social goals are not always one in the same. When we are forced to prioritize one objective over the other, it becomes readily apparent that the work we do is not always so straightforward. As someone who cares deeply in both environmentalism and social inclusion, it is hard to have to consider potential trade-offs.

However, when I take a step back and try to think in larger, philosophical terms, I feel less pressure to choose between these two aspects. While our current capitalist economic model has created significant wealth in the world and greatly improved our quality of life in many ways, it has two principal failings in my view. First, it is not sustainable in the long term because it depends on infinite increases in production despite finite limits in natural resources and also fails to fully account for the external costs of pollution. Second, it marginalizes people who are unable to sell themselves on the labor market, designating them as unproductive members of society outside of the economic mainstream. Both of these problems must be addressed. If we want to work toward creating an economic order that is both more sustainable and just, and I for one certainly do, then we need to avoid falling in the trap of thinking that promoting environmentalism and social inclusion are somehow mutually incompatible.

In practice, I know that I will still struggle at times to simultaneously achieve both of these goals in my work. There will be instances when I feel compelled to choose between one aim and the other, as I have already seen through my research here. But ultimately, we have to keep working to combine environmentalism with social inclusion as much as possible, because that is the only way that we will be able to improve society as a whole.

Some pictures from ITAURB:

Unloading the recycling truck at the silo (lower level is the chute and conveyor belt)

Workers sorting on the conveyor belt

'Fine Sorting' - Plastic Area


Pressed materials in storage (wrapped in cardboard, weight written on side)

Minas International Presentation

Several weeks ago, I gave a presentation at an event for Minas International, a network of English-speaking foreigners and native Brazilians here in Belo Horizonte that organizes various business, social, and volunteer events. (More info on Minas International - www.minasinternational.com)

Attached is a link to my presentation. I left most of my talking points brief and then filled them in during the actual presentation, so it's hard to get a full sense of what I discussed, but this nevertheless provides an outline of the key points I tried to raise during the talk.

For any Portuguese speakers, if you look on the right side of the website under "Related", you will be able to see various other presentations from people involved in the MNCR - technical advisors, catadores, government representatives, etc. There are also some international presentations, including some in English, in case anyone wants to check those out. Enjoy!


http://www.slideshare.net/MinasInternational/trash-talk-by-patrick-mcananey-2-august-2011

Capacity Building in the Cooperatives

As I mentioned in my last post, one of the greatest challenges we are dealing with in our work is the process of building capacity within the cooperatives while respecting their existing structures and work methods. Last week, during a visit to Coopert, a cooperative in Itauna, MG that is part of the Cataunidos network, I had to deal with a very simple example of this difficulty.

Currently, we are trying to systematize information gathering across the Cataunidos organizations as part of our goal of standardizing and improving financial management of the cooperatives. At Coopert, we are working with the treasurer to develop systems to measure employee wages and benefits, fixed and variable expenses, and quantity/price of commercialized materials. I helped put together some spreadsheets for the treasurer to use in order to track this data, based off of information the cooperative already collects. However, as we were going over the forms, it became pretty apparent that we were going to have some issues.

Right now, hours of the Coopert associates are added up manually. But instead of using a regular decimal system, the treasurer adds the numbers up so that decimals represent minutes. That is, 18.2 means "18 hours and 20 minutes" even though that is not an equivalent value. So when adding all the hours together and then multiplying it by the hourly wage (dependent on total income earned in the cooperative divided by total numbers of hours worked by all associates), the end result is an inaccurate number. When I tried to explain to the treasurer that she had to convert the hours/minutes numbers into decimal numbers, she quickly became confused. Although I tried for a while to explain the idea (with help from Guilherme, one of the INSEA technicians), it became apparent that she was becoming discouraged and preferred to just keep using the system that they already had in place. Then, an ex-treasurer of Coopert came in to the office and told us that he thought messing around on computers was too complicated and was bound to mess up their administrative process.

The whole experience was quite revealing to me in terms of the practical limits we are dealing with in this movement. The catadores in general lack very basic education, meaning that something as simple as the difference between decimal numbers and hour/minute numbers can be a huge problem for them. This anecdote reveals just how far off we are from having the cooperatives really take control of their financial management, create strategic business plans, and commercialize effectively through the Cataunidos network in order to become commercially viable businesses. The idea of using computers, even for something as simple as spreadsheets, clearly is not going to work, at least in the short term. As soon as something goes wrong (having to add another column, or an Excel formula error), the entire process would become messed up as they would not have the detailed knowledge to fix the issue. The problem is that you cannot build a strong cooperative administrative structure without an educational base to begin with.

And yet building that educational base is a challenge. If we were to show up one day at the cooperative and try to convince everyone to take a math class, they would no doubt yell at us and say the activity was worthless - when a catador needs to collect, sort, and process his materials, what good is learning some abstract theoretical concept like math that has nothing to do with his daily life? Incentivizing the community to build the educational base is extremely difficult.

Yet if we take the other approach and focus simply on skills training for the select few in the directorship, other problems arise. First off, leadership positions are supposed to rotate, and the most successful cooperative leaders sometimes end up leaving the group to pursue new opportunities anyway (the traditional head of the Nova Lima association, for example, is now running for city council). So the strategy can backfire due to the simple issue of turnover. But also, it is hard for the leadership of the cooperatives to stake out unpopular positions among the group, due both to simple peer pressure and presumed respect for democratic decision-making. So if we focuses our training on a few individuals without building consensus, this often fails anyway as the leaders are unable to win support for new administrative procedures. It really creates a tough situation from either direction.

One thing that caught my eye was the history of Rede-sol, a separate network of catadores in the BH metro area that is not affiliated with Cataunidos. The Rede-sol cooperatives are in fact much more effective at financial management than the Cataunidos groups, which at first gave me hope that we had discovered a successful model that could be replicated. However, when I dug deeper I found that this was not the case. Rede-sol is successful in its financial management precisely because it has the sort of traditional hierarchy that the Cataunidos groups try to avoid - the leaders in the diretoria tend to have a very different profile from the rest of the workers, coming from more skilled labor and educated backgrounds. They end up taking control of the cooperatives and centralizing decision-making. While this brings clear benefits in terms of management efficiency, the fear of creating a two-tiered system within the groups certainly gives me pause.

At times, I get frustrated dealing with these issues because there really seem to be no good answers. Is there a way to build and strengthen these cooperatives and associations without sacrificing the social cohesion, inclusion and equality that they have worked so diligently over time to cultivate? At this point, I really just don't know.


Some pictures of Coopert:

Coopert truck - materials are unloaded at the entrance to the cooperative

Entrance to the silo - materials are pushed down the chute to be sorted

Side view of the silo - materials fall down chute and then onto a conveyor belt for sorting. Once sorted, the materials fall down various chutes into bags below the conveyor belt.

At the end of the conveyor belt, rejected material is discarded into an open area, where it is eventually removed to the landfill next to the cooperative.