Building 21st Century Cities: Urban Development in Brazil

One of the most important phenomena transforming the world economy in the 21^st century is the urbanization of emerging market countries. Whereas industrialized nations in North America, Europe and East Asia underwent a broad transition to urban life during the 1900s, most people in the rest of the world continued to reside in rural areas, working mostly as farmers. I have written previously about the importance of urbanization to economic development. In essence, urbanization is the most radical change to occur in human society since we shifted from migrant hunters and gatherers to stationary farmers many millennia ago. It enables economies to shift from subsistence agriculture to higher-productivity manufacturing and service activities, which allows for more specialization and, therefore, a more diverse array of work opportunities that leads to greater wealth creation. The overall trend line toward urbanization is very clear, as this chart illustrates:

This second chart also illustrates how major emerging markets are still catching up to the West, with middle-income countries such as Brazil already well along in the process:

How emerging markets handle this urbanization process will go a long way toward determining the structure of the global economy. Building efficient, productive cities that provide necessary public services and a high quality of life will be the key to unlocking the potential of the world’s low- and  middle-income nations.

Nowhere is the need for effective urban planning clearer than in Latin America. The region is already the most urbanized in the world, with 80% of residents living in cities. (This number is expected to grow to 90% by 2050, slightly ahead of the U.S. and Europe, as the previous graphic illustrates.) Latin America has long been famous for its poorly-organized megacities such as Santiago, Mexico City and São Paulo: chaotic, congested urban areas known for a high prevalence of dangerous crime, environmental degradation, and sprawling shantytowns. Latin America experienced its urban boom in decades when public administration was weak and local governments were ill-equipped to deal with the influx of new residents. Municipal planners have been forced to play catch-up ever since. Changing Latin America’s historical path of urban development is a vital task in the region’s quest to converge with the living standards of the West.

As the most prominent and populous country in Latin America, it is no surprise that Brazil is home to the greatest number of urban centers in the region. The McKinsey Global Institute recently published a study highlighting the “Emerging 440” cities in the developing world that are expected to generate nearly half of global growth in the 21^st century. Of the 54 Latin American cities to make the list, 27 are in Brazil. In addition to its 25 “middleweight” cities such as Goiania, Manaus and Porto Alegre, Brazil is also home to 2 of the world’s 27 megacities, São Paulo and Rio de Janeiro. (Latin America has 2 other megacities, Mexico City and Buenos Aires.) Outside of McKinsey’s “Emerging 440”, with its emphasis on large cities, Brazil is also developing many smaller regional cities. In my state of Minas Gerais, for example, Belo Horizonte is the main city located in the center, but there are other growing urban areas such as Governador Valadares in the East, Montes Claros in the North, Juiz de Fora in the South, and Uberlândia in the West. With its sizeable number of large, medium and small cities dispersed across the country, Brazil thus has a strong urban base to serve as the motor for the country’s economic development. The trick moving forward will be to create effective urban administration to unlock productivity gains and improve living standards.

Brazil’s Urban Challenges

Take a quick visit to any of Brazil’s major cities and the scope of the country’s problems becomes quickly evident. These urban areas tended to develop in a very chaotic fashion, with patchy public services such as electricity, clean water, waste collection and sewage treatment. Housing is clearly lacking, and many poorer residents have resorted to building makeshift slums on occupied territory, leading to the country’s infamous favela problem. Transport infrastructure is also lacking, leading to disorderly and confusing neighborhoods where narrow roads twist and turn without any clear overarching structure. There is little to no effort at urban zoning, meaning that residential houses, nightclubs, factories, stores, and other properties are all interspersed throughout the city in no coherent order, making the organization of the city that much more challenging.

While these issues have always been a problem for Brazil, they have become painfully acute in the last decade as a growing middle class upends traditional urban structures. As befits one of the most historically unequal countries in the world, Brazil’s cities have long been defined by the gap between the haves and the have-nots. The country’s glaring wealth gap has often shocked foreign visitors who have difficulty in adjusting to the jarring views of luxury apartments located next to sprawling favelas, as in the following picture:

Yet Brazil’s ongoing economic transformation is beginning to render such traditional depictions obsolete. While the country remains extremely unequal, it is increasingly becoming defined by its growing middle class, which just a few years ago became the majority of the country’s population. The growth of this consumer class has led to explosive demand for automobiles, housing and electricity. Brazil’s municipal governments are now under greater pressure than ever to provide quality roads and public transportation, build residential areas with access to clean water, energy, and sewage, and design effective public health, education, and policing systems. Whereas Brazil’s wealthy families have traditionally eschewed the government to pay for their own services and its poor families were accustomed to being ignored or mistreated, its emerging middle class has raised expectations for what local government can and should provide for its citizens.

One of Brazil’s greatest challenges to improved urban planning is the inherent difficulty involved in redesigning cities that are already highly populated. It is difficult to design new roads, communities and public transport when that would involve tearing down and rebuilding certain parts of urban centers. Whereas China has prepared large urban infrastructure projects in sparsely populated cities in expectation of future migration booms, Brazil is trying to accomplish the feat after, not before the fact. (China’s approach is not without its own problems, as many have criticized the country for an unsustainable building boom in ghost cities, creating a bubble that is sure to pop.) Therefore, in addition to the basic challenge of organizing its cities, Brazil faces the additional difficulty of having to integrate pre-existing communities into its design.

Integrating the Favelas

Nowhere is this challenge more apparent than in the favelas. Long the centers of urban violence and drug trafficking, Brazil’s favelas often operate as independent states where local authorities do not dare enter. This exacerbates crime issues and also makes life difficult for the slum residents who are often forced to live in fear. In order to change this situation, the Rio government has been implementing a favela pacification project as part of its World Cup and Olympic preparations. With help from the army, it has sent police pacification units into 26 local favelas near the city’s famous “South Zone”, along the beaches of Ipanema and Copacabana. The goal of the pacification units is to push out the drug traffickers and create space for the local government to move in and integrate the communities into the rest of the city. If successful, the pacification policy may end up being replicated in favelas across Brazil.

So far, there have been both positive and negative signs. Increased provision of public services shows that the communities are indeed becoming integrated into the city. The municipal electric utility has seen its number of clients explode, with 160,000 new individuals connected to the grid and delinquency rates falling from 59% to 10.6%. The government is also working to hand out property titles to favela residents in the occupied communities, thus validating their home ownership. Banks are beginning to install branches in the favelas, providing access to credit, and a new gondola in Complexo do Alemão has offered a new, innovative form of transportation for residents of the isolated, hilltop community. Perhaps most important of all, crime is on its way down, making the notoriously dangerous city significantly safer.

Yet not everything has gone smoothly. Conflicts between favela residents and police units have led to tension in the communities, and sporadic outbreaks of violence still occur. There are increasing worries over gentrification, as wealthier individuals move into the community and drive up prices, breaking up traditional social structures and forcing residents to the city’s periphery. There have been other complaints about more direct government bullying, as favela residents are pushed off their property to make room for new projects for the World Cup and Olympics. The pacification forces have also created a new problem: renegade police militias that take over the communities and repeat the violent, corrupt rule of their drug trafficking predecessors. Marcelo Freixo, a current candidate for mayor from the hard-left PSOL, built his political career on investigating and criticizing state and local government complicity in the city’s burgeoning militia problem and was profiled in the popular film "Elite Squad: The Enemy Within". The final drawback to the occupation policy is that, unsurprisingly, pushing the drug traffickers out of one region has simply made them pop up in other clandestine areas, further away from government control. Instead of solving the problem of urban crime and the drug trade, the pacification units simply relocate it.

Despite the drawbacks, the pacification policy seems to me to have been a major success. The remaining problems—police corruption, gentrification, drug-related crime—are fundamental issues of urban society that no country has been able to completely solve. The pacification policy was not designed to end crime or inequality, but rather to reduce it by providing the overall security cover to slowly integrate slum communities into the rest of the city. In this respect, it is clearly moving in the right direction. Violent crime is down, public service access is up, and the occupied favelas no longer operate as separate states-within-a-state. The real test of the policy will come after the Olympics when the pacification units withdraw, to see if the integration becomes self-sustainable. If so, one of Brazil’s urgent priorities will be to replicate it across the country. Occupying 26 favelas is a promising start, but it is just a drop in the bucket when one considers the hundreds of major slum communities still under control of the traffickers. Favela integration will be a long and difficult process.

Other Major Issues: Developing the Periphery, Sustainability, and Innovation

Although favelas may get all the international publicity, there are other integration problems facing Brazil’s major cities that are perhaps more important. Chief among these concerns is the integration of the periphery. While the country’s elite tend to live in luxury high-rises in the city centers, the growing middle class has been forced to look for affordable housing in less convenient areas further away from the center. Current transportation structures are designed on a “hub-and-spoke” model with all activity and transport flowing between the center and individual communities along its edges. This leads to huge amounts of congestion and inefficiency in terms of transportation. (This is a problem faced by urban planners all over the world.) New roads and public transportation systems will have to be designed that emphasize circular, ring-based patterns that allow for transit to flow in different directions and enable more interaction between communities on the periphery. To have an idea of what such design would entail, here are two contrasting pictures of the São Paulo metro (hub-and-spokes) and the Beijing metro (more circular design):

São Paulo Metro

Beijing Metro

A similar effort will be needed to build “beltway” ring roads that allow traffic to move circularly around the city as opposed to moving through the city center. Such systems are standard in the U.S., Europe and East Asia. This will greatly improve urban transit flows and reduce Brazil’s congestion problems. Once again, a comparison between the São Paulo city map and the Beijing city map is useful to understanding visually the different road structures of the two cities.

Another issue Brazil faces is its need for sustainability, particularly better environmental enforcement to improve urban air quality and limit pollution. I am often struck here by the low standards for truck emissions and the thick hazes of smog. Yet in this aspect, the country is moving in the right direction, albeit slowly. São Paulo now requires emissions checks for vehicles, a practice that should become more widespread and rigorous over time. More investment will need to be made, however, to upgrade truck fleets to more modern, low-emissions vehicles. There is strong public demand for more bike paths and metro systems, and the fact that these topics are increasingly becoming part of the national conversation shows Brazilians’ desire to switch to lower-polluting forms of transport. Also, as I have obviously mentioned many times before on this blog, Brazilian cities struggle with their waste management and low overall recycling rates. The main urban centers have also tended to neglect their rivers and inadequately treat their sewage, making waterways such as São Paulo's Tiete inhospitable and reducing opportunities for pleasant urban green space such as riverside parks. On a positive note, the country’s reliance on hydroelectric power means that power plant emissions remain quite clean, making air quality better than it would otherwise be. Overall, when it comes to the sustainability of Brazilian cities, there are both positives and negatives, and many challenges ahead. Like other countries across the world, Brazil has much work to do to make its cities greener, more livable, and more sustainable.

In addition to better planning and infrastructure, Brazil also needs to embrace innovation in its urban development process. The rising number of global cities offers opportunities for exciting local experimentation to solve issues faced in urban areas across the world. Rather than simply copying existing Western models of urban planning, Brazil should embrace new technology (especially digital IT systems), encourage individual cities to test new approaches, and promote the replication of successful pilot projects. Brazil has a good track record in this area. Perhaps the most famous example is Bus Rapid Transit (BRT), a system of high-speed bus lanes and stations that was pioneered in the southern city of Curitiba. BRT was so successful that it was eventually implemented in major cities such as Los Angeles, Beijing and Bogotá. Brazil is now working to install the system in 11 other major cities, including São Paulo and Rio. Another example is the IBM “Smarter City” command center recently installed in Rio, which serves as a focus point for coordinating the city’s crisis response and infrastructure systems. On a more personal note, Belo Horizonte’s inclusive waste management system that promotes the integration of catadores has also served as a model for similar efforts across the globe and is the reason I wound up in this city. These examples of experimental local projects highlight Brazil’s potential for innovative thinking and ability to pilot test new ideas in 21^st century urban development.  

Municipal Elections and the World Cup: A Country at a Crossroads

As Brazil gears up for a new round of municipal elections this October and the World Cup in 2014, urban development has become a hot topic of discussion. The Brazilian government portrayed its role as a host country as a chance for the nation to embark on a wave of modernization projects to bring its cities into a new era, making big investments to lay the foundation for major productivity gains and sustainable development. In many ways, this could be Brazil’s biggest chance to overcome its history of urban mismanagement and announce the country’s emergence on the world stage. And candidates from across the political spectrum are currently running across their cities, vying for the chance to be the leaders to turn this dream into a reality.

Construction has certainly been booming in preparation for the events, but progress has been slower than many had hoped for. Officials from FIFA (the international soccer federation) have gotten into public spats with their Brazilian counterparts, complaining about the lack of adequate preparation and repeated delays to projects. As many projects fall behind schedule, people are beginning to worry that the country is squandering its chances to finally overcome its urban development issues. And in some cities, particularly Rio, there are complaints that many projects have been poorly planned to meet the country’s real needs, and that instead of untangling congestion problems, they will end up as mere white elephants. While the national government may talk about increasing investment and innovation, in practice it has done little to reduce the nightmarish bureaucratic processes that lead inevitably to delays, cost overruns, and uneven planning. Even among its Latin American peers, Brazil’s implementation record remains weak. Whereas São Paulo and Mexico City started to construct their metros at the same time, São Paulo has only 71 km of lines, whereas Mexico City boasts more than 200 km. Improving upon this sort of weak track record will require a major overhaul in public administration. This is not something that can change overnight, even for an event as urgent as the World Cup.

Over the long run, however, Brazil’s chances still seem bright. The World Cup will result in major upgrades to local roads and airports (as well as the favela integration project) that will form important first steps for the country. And democratic pressure is increasingly holding local government officials responsible for providing results. Improving urban transport and public services is a nonstop complaint among local Brazilians, and is the first topic to appear in nearly all mayoral debates and television ads. Recent polling data shows that candidates’ voter support is very directly tied to the perceived effectiveness of the administration in office, meaning that the public is doing a relatively good job keeping track of the government’s performance and promoting accountability. The more that public pressure grows, the more that business-as-usual will become an unacceptable approach for government officials.

Urban development is never a sudden process. It is built slowly over time, developing more effective public administration to reduce corruption, invest in infrastructure, provide public services, integrate communities, promote sustainability, stimulate innovation, and enhance democratic accountability. Brazil is clearly making progress on these fronts, although major hurdles remain. It will be up to the country’s next crop of mayors to build productive, efficient cities that enhance the country’s economic activity and improve quality of life for its citizens. While much of the world’s focus may be on actions by the national government, it may be local government that ends up making the most important stimulus push of all.

Wages, Productivity and Inequality

I have mentioned previously in several posts the impressive success of the “Brazil Model” over the last decade. Under PT leadership, the country took advantage of a global commodity boom to build a middle class, increasing wages to reduce inequality. This fortified the country’s domestic consumption market, which in turn became a new growth engine for the national economy.

However, there is a very important downside to this development. Over the last decade, wage increases rapidly outpaced productivity gains, meaning that labor costs rose despite the fact that businesses were not increasing their output per worker. Wage growth is the key to reducing inequality, but without productivity gains such growth is unsustainable. Now that the commodity boom is over and Brazil’s economy is coming back down to Earth, the reality has become readily apparent. Growing wages in Brazil without massive investment in education, infrastructure and capital goods (such as machinery) have eroded the country’s competitiveness, and there is legitimate fear that recent gains in reducing inequality may be reversed in subsequent years.

Brazil’s situation stands in stark contrast to the U.S. and Germany, two manufacturing powerhouses that have seen wages stagnate over the last decade as productivity skyrocketed. Innovation, mechanization and globalization enabled businesses to reduce labor costs and increase their output per worker, while the purchasing power of the middle classes eroded and inequality crept upward. The result was therefore the opposite of what happened in Brazil: growing inequality helped businesses to maintain competitiveness in the global economy, and these countries now have some of the most dynamic manufacturing sectors in the world. But this led to other serious structural imbalances. In the U.S., the middle class turned increasingly to credit, which ended catastrophically in the collapse of the mortgage market in 2008. In Germany, growing export competitiveness combined with limited domestic demand led to unbalanced trade relations with Southern Europe, culminating in the ongoing Eurozone crisis.

The interplay between wages, productivity and inequality is therefore a fundamental challenge facing the world economy, and Brazil and the U.S. represent two opposite approaches that both have major shortcomings. In theory, wage increases should increase in tandem with productivity growth, but in practice this can be hard to achieve. In a society like Brazil with historically entrenched class divisions, reducing inequality is a top priority for policymakers and citizens alike and it is hard to argue from a moral perspective that the country should abandon this approach in order to maintain the international competitiveness of its businesses. Furthermore, the difficulty of unlocking productivity gains from within the middle-income trap means that Brazil would have few opportunities to build its middle class. In the U.S., unions have been the traditional guarantors of wage increases, but globalization has undermined their negotiating power as companies can simply choose to relocate to keep labor costs low. Policymakers have struggled to find an adequate alternative to guarantee that productivity gains “trickle down” to the rest of society.

What then, is the most appropriate approach to take on this issue? Are there moments when business competitiveness should be prioritized over inequality to create more wealth and innovation? And are there other moments where combating inequality should be the more central focus, especially in developing countries? It is difficult to come up with straightforward answers to this question, especially as the nature of the world economy rapidly changes due to globalization, digitization and automation. The growing role of additive manufacturing and internet services is causing such a paradigm shift that many now argue we are on the verge of a third industrial revolution that could completely transform society and upend our traditional models of economic development based on mass manufacturing systems. I have written before about how technological changes will force us to radically rethink our understanding of wages and productivity in the future. Looking at the difficulties currently faced by Brazil, the U.S., and Germany, a revolution in the nature of work may be the best chance these countries have of escaping their current paradoxes.

Analyzing the Political Landscape: Historical and Current Patterns

In this extensive post, I will explain Brazil’s political structure, starting with a historical overview and then moving on to an analysis of current trends, with a focus on the upcoming 2012 and 2014 elections.

The Brazilian Empire and the Old Republic: 1808-1930

Like most Latin American countries, Brazil won its independence in the early 1800s, as the Napoleonic Wars led to a collapse of the old monarchies in Spain and Portugal and weakened those countries’ control over their overseas territories. However, Brazil’s trajectory during this period was very different from its Spanish-speaking neighbors. In 1808, Dom João VI, the Portuguese regent, was able to escape Napoleon’s advancing army, fleeing Europe with the help of the British navy and moving his court to Rio de Janeiro. This in itself was a remarkable event: Dom João became the first colonial ruler to set foot on his overseas territories. It was also a key moment in Brazilian history, as the presence of the Portuguese court helped to transform Rio into a true capital city, strengthen independent Brazilian institutions, open the region up to international trade, and keep the territory intact during a tumultuous period of secessionist insurrections. Upon Napoleon’s defeat, a liberal revolution broke out in Portugal and the country’s new rulers ordered the king to return to Europe in 1821 and sign a new constitution limiting the power of the monarchy.

King João left behind his son, Crown Prince Pedro I, to rule Brazil in his stead. When the new Portuguese leaders then requested Dom Pedro I to return as well, he responded defiantly and declared Brazil’s independence in 1822. This was an ironic historical event, as the old ruling dynasty of the colonial power declared independence from the new liberal elite that had established a more progressive constitution. It was virtually the opposite, in fact, of what had occurred in the United States fifty years earlier. Dom Pedro I declared himself Emperor of Brazil and established a highly centralized constitutional monarchy. Remarkably, he was able to keep the country from disintegrating, putting down revolutions from both Portuguese loyalists and liberal republicans across Brazil. While the remains of the Spanish empire splintered into numerous countries, the continuation of the Portuguese dynasty in Rio enabled Brazil to hold itself together, thereby consolidating its position as the giant of Latin America.

Brazil continued to operate as a constitutional monarchy until 1889, when Dom Pedro II (the son of Pedro I) was overthrown and the country declared a democratic republic. In truth, however, the country was still nowhere close to a true democracy. Like its Latin American peers, the early Brazilian republic was essentially an oligarchy controlled by the landed elite. The country’s economy was based on agriculture organized around latifundios, essentially feudal-style land plots where peasants were controlled by local “coronels”. Whereas in the U.S. Jacksonian democracy broke the rule of the landed elite in the 1830s and enhanced participation by the masses (part of the world's "First Wave" of democratization), in Brazil the coronels continued to rule with an iron fist. The presidency was determined by the “Coffee with Milk” alliance, where the office alternated between coronels from São Paulo (coffee farmers) and Minas Gerais (dairy farmers). Although slavery was abolished in 1888, the vast majority of the population continued to be illiterate peasants with no land titles or guaranteed rights.

Industrialization and State-led Development: 1930-1985

The Old Republic collapsed in 1930, when a military coup established Getulio Vargas as dictator. Vargas used populism to enhance his support base beyond the military, appealing to the lower classes through a drive toward state-led development and industrialization. He established Brazil’s large state companies, such as Vale and Petrobras, expanded the electorate, created new social welfare programs, and co-opted the nascent workers’ movement in order to limit and control its influence. This earned him the popular moniker of “Father of the Poor”. Vargas’ legacy is controversial and many compare his regime to European fascism, despite his decision to side with the Allied powers during World War II. Yet there can be no doubt that his most profound impact on Brazilian politics was to diminish the power of the landed elite, moving Brazil away from an agrarian society and creating more spaces for participation by the masses.

After World War II, Vargas allowed for more open elections, following in the pattern of the “Second Wave" of democratization that saw new regimes established in Europe, Africa and Asia. After stepping down for six years (despite wielding behind-the-scenes control), he was re-elected as president in 1951. However, Vargas soon ran into tensions with right-wing army officers and committed suicide during a confrontation with them in 1954. Following Vargas' suicide, the army was unable to establish control and thus had to cede to open elections, paving the way for the “Golden Years” of Brazilian democracy, a ten-year period that saw two presidents elected through direct, popular vote.

The first of these leaders, Juscelino Kubitschek, continued Vargas’ drive for state-led development, promoting urbanization, large public works projects, and the construction of Brasilia as the new capital to “penetrate the interior” of the nation. His successors moved to continue in this direction, but like Vargas before them, they ran afoul of the military establishment, which was concerned about Brazil’s growing relations with communist regimes in Cuba, China and the USSR. Citing the danger of communist influence on the national government, the Brazilian armed forces overthrew President João Goulart in 1964, establishing a new military junta that would rule the country for twenty years. While the military dictatorship represented a very new political order, it continued the country along the state-led development path begun by Vargas and continued by Kubitschek and Goulart, albeit with much greater suppression of workers' movements.

The New Republic: Rise of the PMDB, PSDB and PT

The military regime finally collapsed in 1985, weakened by popular pressure and economic devastation resulting from the Latin American debt crisis. (For more on Brazil's economic history during this period, see my previous post.) The transition to democracy was completed with a new constitution in 1988 and the presidential election of 1989. While many political parties have come and gone during the country’s twenty-seven years as a democracy, three stand out as the most influential.

The Brazilian Democratic Movement Party (PMDB) led the challenge to the dictatorship during the 1980s, forming an umbrella opposition group to coordinate the "Direitos Já" street protests that led to the collapse of the old regime. The party contested the 1985 presidential election (via electoral college) against the ruling junta and its victory marked Brazil’s transition period away from military rule. The PMDB thus shepherded the nation into a new democratic era during the world`s "Third Wave" of democratization.

The Brazilian Social Democratic Party (PSDB) stabilized the country during the 1990s under the leadership of Fernando Henrique Cardoso, who served as finance minister and then president from 1993 to 2003. A former sociologist and political exile, Mr. Cardoso introduced a series of sweeping macroeconomic reforms to bring hyperinflation under control, privatize large, inefficient state-owned enterprises, and open the Brazilian economy up to international trade and finance. Mr. Cardoso thus helped the PSDB to become known as the liberal reform party, reversing sixty years of protectionist, state-led development begun under Vargas and continued under Kubitschek and the military junta. While many criticized these initiatives, especially following the 1998-1999 currency crisis that highlighted the dangers of global capital flows, Mr. Cardoso’s reforms essentially set the stage for the impressive growth Brazil enjoyed over the last decade.

The Workers’ Party (PT) had been a fixture on the Brazilian political scene since the return of democracy, as its leader Luiz Inácio Lula da Silva (Lula) was the presidential runner-up in the 1989, 1994 and 1998 elections. Mr. da Silva finally broke through in 2002, beating the PSDB candidate José Serra by a wide margin due to popular dissatisfaction with Mr. Cardoso following the financial meltdown in his second term. While international investors were at first wary of the PT’s rise due to its traditional left-wing politics, they were pleasantly surprised when Mr. da Silva chose to keep in place many of the PSDB’s economic policies, thus establishing himself as a moderate leftist whose principal contribution to Brazil was to expand the social safety net and combat historic inequality. Mr. da Silva’s time in office also coincided with a huge commodity boom caused by China’s industrialization, allowing him to reap the benefits of strong growth and reach approval ratings of 77% by the end of his second term. The PT remained so popular during Mr. da Silva’s presidency that his hand-picked successor, Dilma Rousseff, was able to crush the PSDB candidate (once again Mr. Serra) in the 2010 election despite being a political novice who had never before held elected office.

Brazil’s democracy over the last quarter-century has thus been remarkably successful at generating political stability. The PMDB, PSDB, and the PT all made important contributions to the country, guiding the transition to democracy, introducing prudent macroeconomic reforms, and reducing inequality, respectively. They still compose the three major political parties in Brazil, with the PSDB and PT in principal opposition to each other and the PMDB the king-making coalition party (it is currently allied with the PT and holds the vice-presidency). Brazil’s political landscape looks especially impressive when compared to its BRICS peers. China is still a dictatorship and Russia an illiberal democracy, while India and South Africa remain dominated by the same political clans that have led them since independence (the Gandhi-Nehru dynasty in India and the African National Congress in post-apartheid South Africa). Politically speaking, it can be said that, for now, Brazil is the most developed of these emerging market powers.

The 2012 Elections: The São Paulo Race and Lula’s Legacy

This October, Brazilians will go to the polls to vote in municipal elections across the country. Campaigning begins in July, and all eyes will be on focused on the mayoral elections and their significance for the 2014 national and statewide contests. The PSDB, currently in opposition, hopes that solid local performances will lay the groundwork for a successful national campaign in 2014. The ruling PT, however, hopes to make inroads in opposition strongholds, most notably São Paulo. As in the US, where midterm elections serve as important gauges of the president’s popularity, many Brazilian political commentators will be reading into the results to determine their impact on Ms. Rousseff’s prospects for reelection.

One of the key questions to be answered in the 2012 elections is the extent of Mr. da Silva’s popularity. After years of sky-high approval ratings and the PT’s crushing win in 2010, Lula still appears to be Brazil’s political kingmaker. Although he lay low in 2011 during a fight with throat cancer, he has since recovered and has been hot on the campaign trail, building up support for several PT mayoral candidates.

The most important race is certain to be São Paulo, Brazil’s biggest city and a longtime PSDB stronghold. Mr. da Silva successfully sidelined other potential candidates from his party to make room for his preferred choice, Fernando Haddad, a former education minister. The PSDB has nominated none other than Mr. Serra, a former mayor and state governor who was twice the party’s presidential candidate in 2002 and 2010. The expectation is thus for a major showdown between the PT and PSDB, although the PMDB has refused to join a coalition and has instead nominated its own candidate, Gabriel Chalita. Mr. Serra has been leading in the polls for now, but Mr. da Silva insists he is still “introducing” Mr. Haddad to the voters.

The most controversial moment of the campaign so far came last week, when Mr. da Silva formed an alliance with an old adversary, Paulo Maluf. A former member of the military-led ARENA party, Mr. Maluf ran against the PMDB candidate in the 1985 election in an attempt to maintain rule by the armed forces. (For those following current events, he is a very similar figure to Ahmed Shafik in Egypt). He was also accused of numerous corruption charges and is currently wanted by Interpol for involvement in international money laundering. A staunch conservative, Mr. Maluf had a strong political rivalry with Mr. da Silva in the 1980s, once accusing him of being a “bird of prey”. The Lula-Maluf alliance has caused a firestorm in the national media, as even strong PT supporters have been dismayed by the ex-president’s political opportunism. It remains to be seen whether the alliance will ultimately help the PT at the polls, but it has clearly hurt Mr. da Silva’s image among many voters. Luiza Erundina, Haddad’s vice-mayoral candidate, dropped off the ticket in protest.

Enter the Challenger: Aécio Neves and the Future of the PSDB

Aside from Mr. da Silva, the other figure to watch in this election cycle is Aécio Neves, a PSDB senator from Minas Gerais. The grandson and personal secretary of Tancredo Neves, the PMDB opposition candidate whose 1985 election signaled the end of the military dictatorship, Mr. Neves is a former speaker of the Chamber of Deputies and two-term governor of Minas. Upon leaving the governorship in 2010, he enjoyed a nearly 80% approval rating, making him one of the few opposition leaders who can claim to rival Lula in popularity. Like Lula, his handpicked successor romped to victory in the 2010 gubernatorial election. Mr. Neves sought the PSDB nomination for the presidency in 2010, but was pushed aside in favor of Mr. Serra. With Mr. Serra now running for mayor and the national leadership of the PSDB eager to expand beyond its support base in São Paulo (Geraldo Alckmin, the current governor, challenged Mr. da Silva in 2006 and Mr. Cardoso also hails from the state), Mr. Neves appears to be the inevitable PSDB nominee to challenge Ms. Rousseff in 2014.

Mr. Neves has been busy barnstorming the country in 2012, supporting PSDB candidates and building alliances wherever possible. A recent report pointed out that he had already traveled to 13 of Brazil’s 26 states during this election cycle and had been discreetly courting support not only from local PSDB leaders but also from PMDB figures such as Sergio Cabral, governor of Rio state, Eduardo Paes, mayor of Rio city, and Michel Temer, vice-president of the Republic. Most importantly, Mr. Neves has been trying to shore up his base of support in Minas, Brazil’s quintessential swing state. In recent elections, the PSDB has had strong showings in the South and Midwest, whereas the PT has relied on support from the North and Northeast. The Southeast has been split and Minas, Brazil’s second-most populous state that happens to be sandwiched between North and South, has been a key factor in propelling the PT to victory:

2006 Presidential Election

2010 Presidential Election

 

To defeat Ms. Rousseff, Mr. Neves will thus have to have a very strong showing in his home state, beginning with a solid performance in the municipal elections this year. The initial signs are promising, as the PSDB has formed a large coalition that hopes to win up to 80% of the state's prefectures. Mr. Neves has also launched a giant public campaign to push for raising the royalties Minas Gerais receives from mining exports, thus throwing down a very clear challenge to the PT to support greater decentralization and state autonomy, an approach expected to go down well not only in Minas but also in Rio, where locals are eager to secure a greater share of offshore oil royalties.

The most important municipal race in Minas this year will be in the capital city of Belo Horizonte, where mayor Marcio Lacerda of the Brazilian Socialist Party (PSB) is running for reelection. Elected in 2008 with the rare support of both the PSDB and the PT, Mr. Lacerda has become an influential figure in the state and a potential gubernatorial candidate. While the PSB is part of the national PT coalition, he has worked in close partnership with the state PSDB government. Last week, the PT/PSDB alliance in the city came apart as Mr. Lacerda, under pressure from Mr. Neves, changed the terms of the coalition, giving less weight to the PT in the city council. The PT, under direct orders from Ms. Rousseff, responded by breaking the alliance with Mr. Lacerda and launching its own candidate for mayor, Patrus Ananias. This has set the stage for a high stakes PT-PSDB showdown in October, with the winning party having the inside track to carry the state in 2014. Early polling shows a tight race between the two contenders.

In addition to forging political alliances and solidifying his position in Minas Gerais, Mr. Neves’ other principal task is to restore the PSDB’s image as the party of economic reform and prudent management. He will do this primarily by drawing on his own history. During his governorship, Mr. Neves instituted a “Management Shock” program that drastically revamped the state bureaucracy, allowing the government to reduce expenditures, seek international investment, and fund new public projects. The Minas government was so successful in this reform that the World Bank began to promote the “Management Shock” policy as a model for improving public administration across the country, and even overseas. Mr. Neves has talked about implementing this program on the federal level, shrinking Brazil’s famous bureaucracy and reducing the size and scope of the national ministries, thus improving the business climate while simultaneously using the savings to increase investment and social projects.

Aside from promoting his own record as governor, Mr. Neves is working to rebrand the PSDB, linking its past success to its vision for the future. He recently announced that the PSDB would soon propose a platform of major changes to be implemented in Brazil over the next twenty years, focused on improving the quality of public administration and provision of services. He has also embarked on a campaign to “rescue the PSDB legacy” and remind voters of the important contributions that Mr. Cardoso made in stabilizing the Brazilian economy and laying the foundation for its current success, initiatives that are often forgotten after the last decade of PT hegemony.

Looking Toward 2014: A Battle of Reformers?

So far, the stage looks set for Mr. Neves and Ms. Rousseff to face off in 2014. There are, however, lingering questions regarding the nomination process for both parties. Although Sergio Guerra, the PSDB president, recently said that Mr. Neves will almost certainly be the party’s candidate, there is still the chance that either Mr. Serra or Mr. Alckmin will make one last attempt at the presidency, thus setting up an important primary contest. On the PT side, Mr. da Silva recently refused to rule out the possibility that he will run again if Ms. Rousseff chooses not to stand for reelection. (Brazil does not have term limits but the same person cannot hold the office for more than two terms in a row.) This has fueled much speculation about the possibility that Ms. Rousseff will stand down and allow Mr. da Silva to contest the election, although most would agree that this possibility is still unlikely.

Should he secure the nomination, Mr. Neves will certainly be in for a tough fight. Ms. Rousseff has been on an impressive run lately, standing up to corrupt politicians in Congress, forcing banks to push down their spreads and offer cheaper credit, pushing back against the military establishment, and solidifying her reputation as a no-nonsense technocrat who has been an adept economic manager during a period of global economic turmoil. She continues to enjoy sky-high approval ratings, breaking even Mr. da Silva’s record after his first year in office. But Mr. Neves has some key factors working in his favor as well. Growing frustration among the middle class with Brazil’s labyrinth of taxes and bureaucracy means that voters should be receptive to an ambitious reformer willing to put forward the sort of comprehensive changes that Ms. Rousseff has so far failed to embrace. His proven track record in a critical bellwether state will no doubt prove an asset. Regardless of the outcome, I am cautiously optimistic that the 2014 presidential contest will at least force a debate on the major reforms Brazil needs to keep moving forward in its development.

The critical factor, as always, may end up being the state of Brazil’s economy. The country has been stagnating for nearly a year already, and all signs point to a prolonged period of subpar growth that could reflect poorly on the incumbent PT. Yet ordinary citizens seem to be surprisingly unaware that this slowdown has even been occurring. Unemployment, perhaps an even more important indicator than GDP growth, continues to hit record lows, falling to 5.8% this month. And Ms. Rousseff seems willing to stake her legacy on an ambitious attempt to cut interest rates, apparently confident that this could be her single greatest contribution to the country’s long-term economic success. If, however, the economy continues to stall and unemployment and inflation begin to creep back up, Ms. Rousseff will almost certainly be looking at a much tougher contest in 2014. In this case, the end of PT dominance may end up coming sooner than most political commentators seem to think.     

Brazil as a World Power

For generations, Brazilian leaders have dreamed of their country occupying a central role on the world stage. As the fifth-most populous country in the world and the leader of Latin America, Brazil has long been poised to emerge as a major power in international politics. Yet every time over the last century that an economic boom signaled that the country’s inevitable rise was finally occurring, a subsequent bust shattered the nation’s confidence and led its citizens to fear that they were destined to remain forever on the “periphery” of world power. This historical pattern led to a famous phrase among locals: “Brazil is the country of the future, and it always will be.” Will this time be different? Does Brazil’s rise mark a permanent transition in the world order, or is it simply an ephemeral triumph resulting from a commodity supercycle fueled by China’s industrialization? Despite the country’s weakening economic position, I believe it is clear that Brazil has been setting itself up to become a major world power for decades to come. Brazil’s rise will not be reversed any time soon.

The clearest sign of Brazil’s emerging influence on the world stage is its alignment with the BRICS nations—Russia, China, India and South Africa—that are rapidly reshaping the global order and rivaling the West for influence. With the West expected to enter a long period of stagnation due to its aging populations and burgeoning debt, the world is increasingly looking to the BRICS to serve as the main engine of global economic growth. The importance of these countries is clear when one looks at recent trends in world GDP:

(Source: The Economist)

Brazil has been eager to play up its partnerships with these nations as it sees alliances with these major emerging economies to be pivotal in helping it gain influence internationally. The shift in power away from the US and Europe and toward emerging economies was accelerated dramatically by the 2008 financial crisis, and the BRICS became a household term almost overnight. The countries now hold annual summits together and confer regularly before important decisions (such as selecting a new World Bank president and providing new credit for the IMF). The BRICS countries have been consolidating these new alliances, with Brazil and China recently executing a currency swap and updating their relations to an official “strategic partnership”. Even India and China, historic rivals in Asia, have been working to improve their relations to fortify the BRICS alliance.

Of course, the BRICS grouping is in many ways a very uneven alliance. China is clearly the dominant power in the bloc, as its industrialization and demand for commodities has pulled the other emerging countries along. South Africa is tiny in comparison to the others, and was mainly included in the group due to its symbolic importance as the “gateway to Africa.” But despite these inequalities, the BRICS alliance is very useful for all parties involved. China is able to gain important allies that it may need in any future confrontations with the West, while Brazil and the others are able to latch onto China’s growing economic and political clout to enhance their own international reputations. The BRICS bloc, therefore, looks set to become a permanent fixture in international politics and represents the most serious challenge to Western hegemony since the fall of the Soviet Union.

Aside from its role within the BRICS, Brazil has been eagerly forming alliances with other major emerging economies. In addition to promoting Latin American integration and enhanced ties with Africa, policymakers in Brasília have been deepening partnerships in the Middle East, especially with the region`s most prominent emerging power, Turkey. The two countries have been developing a defense partnership for several years now, are cooperating increasingly on energy issues (especially in offshore oil drilling), and have worked together on several major diplomatic initiatives, most notably a failed attempt to resolve the Iranian nuclear impasse. Brazil has also been active in Eastern Europe, where just last week Ms. Rousseff signed a new economic cooperation agreement with Bulgaria. By creating partnerships with important countries in regions all over the world, Brazil is quickly solidifying its role as a truly global actor.

As I mentioned in a recent post, Brazil has been perhaps the most vocal country calling for reform of major international institutions. It was one of the major advocates for establishing the G-20 to replace the G-7 as a forum for international economic cooperation in the wake of the 2008 crisis. It has repeatedly argued for an overhaul of the way IMF voting shares are distributed, and threatened to withhold funding for the organization until a clear path for reform has been articulated. It has also criticized the structure of the World Bank and was the only major country to vote for the emerging market candidate over the US nominee for president earlier this year, after a failed attempt to convince its BRICS counterparts to unite in challenging the West. Perhaps most importantly, Brazil has been highly critical of the structure of the UN Security Council. Along with India, Germany and Japan, it comprises the so-called “G-4” countries that have long angled for major reforms that will grant them permanent seats at the table. On this last issue, however, Brazil’s greatest enemy may not be the entrenched Western powers but rather the “Coffee Club” of second-tier world powers that have blocked Security Council reform out of fear of being permanently shut out of decision-making circles. In this respect, the greatest obstacle to Brazil gaining a permanent seat is not the U.S. but rather Mexico, Colombia and Argentina, the three countries most fearful of Brazilian hegemony in Latin America.

Despite its success in building global alliances and pushing for reform of international institutions, Brazil is often criticized in the West for failing to articulate a coherent vision for a new world order. President Lula was seen as a naïve novice whose diplomatic initiatives across the globe could be summed up by the simple strategy of trying to be friends with everyone at once. The fiasco of the failed Iran nuclear deal significantly hurt Brazil’s standing in the West, and the inability to clarify positions on the revolutions in Libya and Syria has eroded confidence that policymakers in Brasilia are ready to participate constructively on the most complex foreign policy issues of the day.

Yet these criticisms are in many ways unfair. As a new kid on the block unaccustomed to the paradoxes of international governance, Brazil has been undergoing a steady maturation process in its foreign policy. While Lula was focused on building partnerships across the world and solidifying Brazil’s international presence, Ms. Rousseff has taken more pragmatic positions, distancing herself from rogue leaders such as Hugo Chavez of Venezuela and Mahmoud Ahmadinejad of Iran. She has also advanced a new principle of international military intervention known as “responsibility while protecting”, meant to supplement the UN’s “responsibility to protect” with a focus on limiting collateral damage and civilian casualties. In many ways, Brazil is establishing itself as a potential mediator to bridge the diplomatic gap between the West and the emerging powers in the East.

Yes, at times Brazil has been too quick to criticize the West without proposing constructive alternatives to prevent civilian bloodshed. But as the country’s international profile grows, it will inevitably be forced to make tougher decisions and propose new paths forward. This is not so different from the U.S. in the early 20th century. At the time, American leadership espoused non-intervention across the world and the establishment of trade relations without preconditions. The U.S. was thus seen as the alternative power to the colonialists in Europe, which helped it to build alliances with distant nations such as Saudi Arabia and Iran. A similar approach can now be seen in the way in which rising powers such as Brazil and China are approaching their new global responsibilities. Over time, they too will be forced to participate more actively and articulate a clearer vision of the world they want to create. Changes in foreign policy following the turnover from President Lula to President Rousseff show that Brazil’s maturation in this regard is already well under way.

Despite economic difficulties caused by the recent slowdown in the world economy, Brazil’s permanent arrival on the world stage appears more certain than ever. This is most readily apparent in the endless stream of international media coverage of the country. Nearly every day, a major U.S. media outlet runs a new story about Brazil focused on the nation’s ongoing transformation. As the host of numerous major conferences and events (such as the Rio+20 summit last week), Brazil has greatly enhanced its international profile. São Paulo and Rio de Janeiro have emerged as two of the most dynamic urban centers in the world, attracting immigrants and visitors from across the globe. With a booming consumer market, a bevy of natural resource wealth, and a stable, pluralistic democracy, Brazil has too many advantages to be ignored. Even if the country’s economy ends up stalling for an extended period of time, its rise as a world power looks likely to be one of the major developments of the 21st century.  

Building Alliances in the South Atlantic: Brazil in Africa

In addition to nurturing its near-abroad by promoting Latin American integration, Brazil is also looking East to build partnerships in other regions of the world. One of the areas where this budding international diplomacy is most apparent is across the South Atlantic, where Brazilians are quickly making their presence felt along the African coast.

Economic Synergies:

There are several areas in which Brazil’s activities in Africa are focused. The first, and perhaps most important, is agriculture. As I mentioned in a previous post, Brazil in recent years has solidified its position as a major world player in agriculture with a clear competitive advantage and broad scientific know-how of how to build a successful farming sector in the tropics. As this chart shows, Africa is in desperate need of an agricultural revolution and Brazil’s remarkable success in this field over the last thirty years reveals a possible path forward:

(Source: The Economist)

José Graziano da Silva, a former Brazilian government official, now heads the UN’s Food and Agriculture Organization, which works to develop food security in Africa. Brazil is helping the continent to mechanize its agricultural sector to improve productivity, highlighted by a recent deal to provide equipment to Ghana. It is also improving research and development through the involvement of Embrapa, the state agricultural research institution, in Senegal, Mali, Ghana and Mozambique. With increased urbanization, changing climates (particularly in the Sahel), a booming population and voracious international appetites (primarily in Asia and the Middle East), Africa faces more food security challenges than ever before. Brazil’s partnership in this field could thus be critical to the region’s future.

The second area of importance is offshore oil and gas drilling. Petrobras has become an international leader in offshore exploration and development, and should continue to solidify its expertise in this area through the experience of drilling the pre-salt fields off the Brazilian coast. New reserves off the coast of Africa offer significant promise as well, as companies rush to invest in the offshore industries of Angola and West Africa. In addition, Mozambique, another Portuguese-speaking country, appears to have promising offshore gas resources that Petrobras is keen to develop. By ramping up investment in Africa’s nascent offshore industry at the same time that it begins to develop its own immense oil riches, Brazil may soon succeed in turning the South Atlantic into a new energy hub.

The third field of cooperation is in mining. After building a vibrant mining sector itself, Brazil has been eager to replicate its success in Africa. Vale, a former state-owned enterprise, has been aggressively expanding into the region since 2004, establishing operations in Gabon, Guinea, Angola, Mozambique, the DRC, and South Africa. The company announced a plan to invest nearly $2 billion on the continent in 2012, primarily in its bread-and-butter iron ore operations, but also in base metals, fertilizers, coal, and steel production.

The commodities boom has been a boon to the global energy and mining industries, and few regions have benefited as much as Africa, home to six of the last decade’s ten-fastest growing countries. There has been quite a lot of talk of Africa’s rise, and the next few decades may well bring about even more impressive developments. By establishing itself as a major partner in agriculture, energy and mining, Brazil is clearly trying to put itself in place to take advantage of this booming market.

Brazil’s banks have been increasing their investment in Africa as well. BTG Pactual, a Brazilian investment bank often called the Goldman Sachs of the tropics, announced last month that it would create a new $1 billion USD private equity fund for the region. BNDES, the state-backed development bank with a loan portfolio four times the size of the World Bank, has also been increasing its investments in Africa with a focus on infrastructure, logistics and social development projects. In a particularly high-profile agreement reached several weeks ago, the BNDES agreed to finance renovations to an airport in Northern Ghana. In general, the BNDES has made it a priority to promote investment that will facilitate trade across the South Atlantic, such as ports and roads. So far, things clearly seem to be moving in the right direction. Trade between Brazil and Africa skyrocketed from $4 billion in 2000 to $20 billion in 2010, and looks set to continue its upward trend.

Promoting Good Governance

Brazil’s potential in Africa, however, goes beyond investment in commodities. Brazil has much to teach the region in the realm of governance, an important factor in turning an economic boom into a true societal transformation. There is much concern in Africa that the current growth in commodity markets is not benefiting common people, but rather enriching the continent’s elite and worsening traditional inequalities. Many African countries, such as Equatorial Guinea and Angola, have long experienced stunning growth rates that have not translated into broad development.

Brazil has much to teach Africa in this regard. Over the last decade, it used commodity-based economic growth to reduce inequalities and build its middle class, creating the famous “Brazil Model” that has become the country’s claim to fame across the world. In addition to its success in creating a social safety net and solidifying its consumer base, Brazil experienced several major breakthroughs in public health initiatives that Africa is keen to replicate, namely in controlling population growth and combating AIDS.

Besides these specific policy areas, Brazil can offer guidance to African leaders on a topic that Western and East Asian advisers cannot easily relate to: shaking off a legacy of colonialism and entrenched inequalities in order to build capable governance structures and vibrant, inclusive democracies. Alongside its BRICS partner, South Africa (regarded as Africa’s natural leader), Brazil has moved forward in trying to strengthen the public sector on the continent, most notably through co-chairing with the United States the Open Government Partnership to promote transparency in governance. This advisory role is a good example of Brazil’s growing soft power on the African continent, which complements its growing economic influence.

One other area in which Brazil has provided support to Africa has been in promoting exchange programs, especially for students from Portuguese-speaking countries such as Angola and Mozambique. As Brazil’s universities continue to grow in stature, this may have the residual effect of improving tertiary education in certain parts of Africa as well.

What Makes the Brazil–Africa Partnership Unique?

Africa’s incredible growth story has been a popular topic for some time now and Brazil is certainly not the only country to make inroads into the region. There has been much focus on China’s growing role on the continent, but other actors such as India and the Gulf countries have also been increasingly active in Africa as they run into resource constraints at home and are eager to lock in supply chains across the world. Western countries are also maintaining their interest, with the former European colonial powers continuing to be involved in trade and security issues and the White House outlining a new engagement plan last week. With all of this international attention, Brazil may seem to be a relatively small player on the continent.

But to compare Brazil to these other powers largely misses the point of Brazil’s involvement in Africa. True, it does not have the financial power of China or the Gulf countries to finance massive infrastructure projects across the region. (In fact, it is having trouble overcoming its own domestic infrastructure challenges.) Nor does it offer the military security or the trade opportunities of the West. Brazil also lacks the demographic heft of China and India, who are able to export millions of workers to the continent and create large and influential diaspora communities. But Brazil does not need these advantages because its goals in Africa are fundamentally different.

As a country with immense natural resources itself, Brazil does not need Africa to keep its economy up and running. Three of Africa’s main potential strategic industries—agriculture, energy and minerals—are in fact the three areas in which Brazil already has a strong competitive advantage. Rather, Brazil hopes to use Africa as a way for many of its largest companies to gain a more international foothold. By expanding operations in Africa, companies such as Petrobras and Vale are able to move beyond their domestic market and consolidate their positions as major multinationals. Odebrecht, a large construction firm, has become the largest private employer in Angola and one of the largest employers in Mozambique.

Politically, Brazil is also seeking to build alliances in its quest to reshape the international order. No country has challenged the existing international structures in recent years more than Brazil. It has fought very publicly for reform of the UN, World Bank and IMF. It has tried (mostly in vain) to rally the BRICS countries around unified positions to challenge Western hegemony in these institutions. In perhaps the clearest sign of growing Brazil-Africa political unity, Brazil was the only major non-African country to vote for Nigerian finance minister Ngozi Okonjo-Iweala to become the new president of the World Bank. (Brazil was actually isolated in this decision as Russia, China and India all voted for the US-backed candidate, Jim Yong Kim.) Over the long term, Brazilians believe that an emerging Africa could become an important ally in this crusade to alter existing patterns of global hegemony.

Brazil has several unique ties to Africa that give it an advantage over the other powers vying for influence in the region. In many ways, Brazil has become the most vocal leader of the so-called “Third World” countries, which has helped it to win African support. (China, which used to occupy this role, has increasingly cast aside a solidary approach to dealing with its emerging market peers as it focuses on its own needs for maintaining its rapid industrialization.) Also, using the lessons from its own development experience, Brazil has tried to promote itself as an example for African countries to follow. In addition, Brazilian policymakers are quick to play up their country’s cultural affinities with Africa, pointing out the country’s large Afro-Brazilian population and cultural ties to their ancestral land. (The irony, of course, is that most of these policymakers are of white, European descent and more similar to their Western counterparts than they often dare to admit.) They have also focused strategically on the continent’s two main Portuguese-speaking countries, Angola and Mozambique, as a gateway to the rest of the region. These distinctive connections are slowly helping Brazil to cultivate its own special relationship with the continent.

Brazil will never be the game-changer in Africa that China is, nor will it rival the U.S. for influence any time soon. But the growing South Atlantic partnership is clearly important in many ways. Aside from the obvious benefits of trade relations, economic synergies, and international development cooperation, an increasingly strong Brazil-Africa alliance could ultimately become one of the most important political forces in international relations, providing both sides can continue seeing eye-to-eye on reforming world institutions. This is perhaps one of the clearest examples yet that the global order of the 21^st century will ultimately end up looking very different from that of the 20^th.

Latin American Integration

Recently, I have focused on domestic policy in Brazil, with an emphasis on the economy. I will now turn to the country’s foreign policy in a series of three posts. This text will focus on Brazil’s role in Latin American integration. The next two posts will highlight Brazil’s growing relationship with Africa and with major world powers.

Regional integration has become a major focus of international relations over the last few years. The major regional integration project is, of course, the European Union, which is dealing with a crisis whose resolution may determine the course of similar projects across the world. But there are numerous other examples of blocs of nations coming together to promote trade and security, such as NAFTA (North America), ASEAN (Southeast Asia), the Arab League (Middle East) and the African Union. Each of these organizations has unique objectives and structures, but they all reinforce a clear trend toward regional political arrangements.

Latin America is no exception to this trend. The longest-running regional political project has been the Organization of American States (OAS), meant to unite all the countries of the Western Hemisphere. For fifty years, the OAS has brought the leaders of the Americas together to discuss important issues such as human rights, peace and security, and economic development. Yet the OAS project may finally be reaching its end. Latin American leaders have increasingly been airing their frustration with the organization, due to its domination by the U.S. (the OAS is headquartered in Washington DC) and its exclusion of Cuba. At the OAS-sponsored Summit of the Americas this year in Cartagena, Colombia, the tension reached a fever pitch. Prominent moderate political leaders such as Ms. Rousseff and Juan Manuel Santos of Colombia challenged President Obama on a range of issues and publicly declared that they would no longer support OAS meetings without the participation of Cuba. The OAS has been eclipsed in recent years by new regional groupings that deliberately exclude the US and Canada, namely the Union of South American Nations (UNASUR, created in 2008) and the Community of Latin American and Caribbean States (CELAC, created in 2010). While the US once led the drive for regional integration through projects such as the Alliance for Progress and the Free Trade Area of the Americas, it is increasingly becoming a side player as Latin American leaders seek to create their own union free from the influence of Washington.

Will This Time be Different?

It is easy to look at the UNASUR and CELAC projects with skepticism. Latin American history is full of failed attempts at regional organization, such as the creation of the Rio Group and the Latin American Integration Association in the 1980s. There has been talk of creating a free trade area for decades, yet little to no progress has been made on this front. Even Mercosur, the most well-established project in the region, has been paralyzed by trade wars between Argentina and Brazil. If even this project has been such a failure, why would anyone expect a more ambitious initiative to be effective?

Look closer, however, and it is clear that the dynamic in the region is indeed changing quickly. UNASUR has made significant progress on several fronts. The most notable of these has been defense policy, where South American countries are increasingly coordinating their militaries to better police the Amazon and crack down on guerrilla groups and narcotraffickers in the region. The body has also promoted infrastructure cooperation, building roads, dams, and telecommunication networks across the continent to promote trade and link the region’s economies together. The group  has also established itself as an important mediator to resolve internal political disputes and threats to democracy, through intervention in 2008 in Bolivia and currently in Paraguay. Finally, there has been significant progress on immigration, as countries abolish visa requirements and create guest worker programs to promote the free movement of peoples and eventually establish a South American equivalent to the Schengen Area in Europe. These advances in security, infrastructure, political mediation and immigration cooperation all signal a new era in Latin American relations.

Yet the true test of progress in Latin American integration is the advancement of a free trade pact among the region’s countries. Establishing a common market is vital to move the Latin American project forward, and it is difficult to imagine increased integration without the creation of a unified trade bloc. This, after all, has been the basis of the European Union for the past fifty years.

Intra-regional Trade

To understand trade in Latin America, it is important to understand how the region’s geography shapes economic activity. The presence of the Amazon Rainforest and the Andes Mountains greatly limits the ability of South American countries to trade extensively with each other. A quick glance at a physical map of the continent makes this clear:

As Brazil’s population and economy is concentrated in the South, its natural geographic trade partners have been the neighboring economies of the Rio de la Plata river basin: Argentina, Uruguay and Paraguay. The Pacific countries of Chile, Peru, Ecuador and Colombia are highly concentrated on the coast and thus more able to trade with each other than with their distant neighbors on the Atlantic. Mexico, the second-largest country in the region, is in North America and is therefore bound more tightly to the U.S. This has led to the natural formation of separate trading blocs in the region.

Structural similarities form another obstacle to increasing trade among the region’s economies. As commodity exporters focused on agriculture, mining and hydrocarbons, Latin American nations tend to trade more with industrialized economies such as the U.S., China and Europe, than with each other. (Brazil does have a large industrial base, but its exports are rarely competitive with those coming from China and other Asian countries.) As a result, many Latin American countries tend to be more focused on trading partners outside the region. These geographic and structural barriers to intra-regional trade are major challenges to further integration efforts. Intra-regional exports make up only 25% of exports in Latin America, compared with 50% in Asia and 70% in Europe. Yet trade is clearly on the upswing in the region, reaching a record $160 billion in 2011. The growing importance of transportation and energy projects with Brazil in smaller countries such as Peru and Bolivia means that these nations understand the extent to which their futures are tied to the behemoth next door.

As negotiations for a regional free trade agreement continue to advance, it is clear that Latin America is splitting into two main camps. The outward-looking, pro-free trade nations of Chile, Peru, Colombia and Mexico recently came together to form the Pacific Alliance, which promotes low tariffs and enhanced ties with Asia and the U.S. Mercosur, led by Argentina and Brazil, has become increasingly protectionist and seems more keen on defending its internal markets than on building trade relations with overseas powers. These two groups appear to have fundamental and irreconcilable differences in their visions for future regional integration, and it seems difficult to imagine that any progress will happen toward this goal if the deadlock is not broken.

(Another obstacle to regional integration has been Venezuela’s Hugo Chavez, who has been trying to win converts to his Bolivarian Alliance, which emphasizes a socialist economic model, radical transformation of domestic political structures, confrontation with the United States and partnerships with international rogue regimes such as Iran and Syria. Mr. Chavez’s influence has been on the wane for some time and his only converts have been relatively small countries such as Nicaragua, Cuba, Ecuador and Bolivia. Yet his alternative project continues to undermine unity among the region’s countries.)

Brazil’s Role

Far and away the largest country in Latin America, Brazil has been the natural leader of integration efforts. With roughly 50% of South America’s population and GDP, Brazil holds unparalleled dominance over the continent. It thus holds the key to Latin American integration. Simply put, there can be no integration without Brazil’s support. Yet Brazil’s protectionism is precisely what has undermined efforts to form a common market. Things have been made worse by the growing recklessness of its principal regional partner, Argentina. As Argentine president Cristina Fernandez de Kirchner rapidly adopts a more aggressively nationalist posture (exemplified by the recent nationalization of the YPF oil company and criticism of British control of the Falkland Islands), Brazil has tried to appease this key ally by raising common tariffs for the Mercosur area. This chart, courtesy of the Globe and Mail, illustrates the recent dynamic:

These are clearly steps in the wrong direction. Until Brazil is willing to break from its protectionist tendencies and sign free trade agreements with the countries of the Pacific Alliance, the common market will remain on hold. However, this may be next to impossible given these countries’ bilateral agreements with the U.S., since Brazil has made it clear many times in the past that it is not interested in signing on to a U.S.-brokered deal.

What makes the Pacific Alliance a potential game changer is that it is composed of the two countries best equipped to challenge Brazil’s regional hegemony: Mexico and Chile. As the second largest country in the region, Mexico has long vied with its Portuguese-speaking counterparts for influence in Latin America. Chile, despite its tiny size (8% of Brazil’s population), has been the best success story in the region over the last two decades, enabling it to adopt a lead-by-example approach. Individually, these countries do not have the political clout to challenge Brazil’s leadership: Mexico is too distant geographically and Chile is far too small. But by joining together with several other allies (Panama and Costa Rica have also expressed interest in joining the Pacific Alliance), they may be able to exert greater pressure on the Brazilian government to change its present course.

Brazil has cemented its position as Latin America’s leader over the last decade through a clever mix of soft power and economic muscle. But Brasilia’s influence over the region may begin to wane if it cannot kick-start economic growth. After a decade of rapid expansion, Brazil has fallen to the back of the pack, registering a mere 0.8% annualized growth rate in the first quarter of 2012. The countries of the Pacific Alliance, by contrast, continue to surge ahead. Over the same period, Mexico grew by 4.6%, Chile by 5.6%, Colombia by 5.4%, and Peru by 6.0%. Unless it arrests these trends, Brazil may find its star diminishing across the region.

High-end Manufacturing

One of the most essential steps in transitioning from a middle-income country to a high-income country, as I have mentioned before, is the development of a competitive high-end manufacturing base. This means moving beyond the low-end basic assembly of products (think large-scale factories using an army of cheap labor) into more advanced, innovative product design and development. Once again, Japan and South Korea are useful examples in this regard. Both began their process of industrialization with low-end manufacturing, assembling basic products and exporting them to consumer markets in the West. But slowly, they developed innovative capacity and began to design and build their own high-end products, such as cars and electronics. While their brands were at first viewed with disdain and suspicion by Western consumers, companies such as Toyota, Samsung, Hyundai, Toshiba, Kia and Sony all became extremely successful at producing cutting-edge technology used the world over. The success of this high-end manufacturing catapulted Japan and Korea past their middle-income peers and into the ranks of the world’s wealthiest nations.

China is now trying to follow in the footsteps of its East Asian peers, investing huge amounts of money to build its own high-end manufacturing base. The country’s leaders are trying to shed their nation’s status as the global center of low-end manufacturing and instead develop indigenous brands that are known for quality and innovation. Brazil faces a similar challenge. The government has long been on a quest to produce “national champions”, local companies that are globally competitive in major fields.

For me, a simple but effective way to evaluate a country’s high-end manufacturing base is to look at its car production. Car manufacturing is a classic symbol of industrial societies. Due to the complexity of designing and mass producing quality automobiles, it is a very good indicator of a country’s innovative manufacturing capacity. All of the major competitive economies have at least one or two well-known car brands: Chrysler, GM and Ford in the U.S.; Jaguar and Rolls Royce in Britain; Renault, Citroen and Peugeot in France; Fiat in Italy; Volkswagen, BMW and Mercedes in Germany; Volvo and Saab in Sweden; Toyota, Honda and Nissan in Japan; and Hyundai and Kia in South Korea. (Caveat: some smaller wealthy economies do not have their own car brands, but are known for other national champions, especially in the area of electronics, such as Nokia in Finland and Research in Motion in Canada.) If a major emerging economy is unable to produce a single car brand, this is normally a strong indicator of the country’s underlying competitive weaknesses in manufacturing.

China’s growing success in car manufacturing suggests that it is quickly consolidating its high-end manufacturing capacity, a trend that should continue over the next several decades. Chinese brands such as Great Wall and Chery are already starting to penetrate foreign markets, and these cars are quickly becoming more commonplace here in Brazil. As with their Japanese and Korean counterparts, Chinese brands have been scoffed at by wealthy consumers skeptical of their quality. Over time, however, I suspect that this will change and Chinese cars will be just as common as Volkswagens or Fords on roads all over the world. This will be a clear indicator of China’s continuing development.

A quick look at the car industry in Brazil raises serious concerns about this country’s progress in developing high-end manufacturing capacity. Brazil is the world’s third largest consumer market for automobiles (after the U.S. and China), yet it does not have a single national brand. For many years, the government has tried to foster a national car industry in the way that it normally attempts to build national champions: imposing high tariffs on competitive imports and domestic content requirements that require foreign companies to set up factories within the country and develop supply chains with local industries. The result? Brazil is the most expensive major country in the world in which to purchase a car, as high production costs are passed on to consumers. And as of yet, there is still no sign of an emerging national car brand. As I mentioned in a previous column, the government has recently been increasing these tariffs and establishing quotas on car imports from Mexico to protect its domestic manufacturers and prevent further “deindustrialization”.

Despite the obvious failure of Brazil’s car industry, there are promising examples of Brazil’s high-end manufacturing capacity in other fields. Embraer, a former state enterprise, is a leader in the global aerospace market, becoming one of the world’s largest airplane manufacturers and competing successfully with international brands such as Boeing (U.S.), Airbus (Europe), and Bombardier (Canada). Embraer’s jets are famous all over the world for their quality, and chances are high that anyone who flies regularly has sat in an airplane designed and manufactured in Brazil. Marcopolo, a bus manufacturer, has had equally impressive success. In addition to dominating the large national market, it has expanded its operations all over the world and produces buses across Latin America, South Africa and India.

The success of Embraer and Marcopolo provides optimism regarding Brazil’s future. If the country can produce globally competitive jets and buses, it is surely capable of developing the high-end manufacturing capacity that will enable it to become a major economic power internationally. In addition to these manufacturers, the country is on the cutting edge of other global technologies, such as deep-sea oil drilling and biofuels. The question therefore becomes how Brazil can deepen and broaden these competitive advantages and build more national champions.

There is, of course, no straightforward answer to this question. It is easy to lambast Brazil for its damaging, ineffective protectionism. There are many examples of failure aside from the car industry. The government has been trying to take advantage of its growing offshore oil production to produce new national champions in related fields such as shipbuilding, using domestic content requirements that force oil companies to purchase locally and prop up nascent industries. So far, however, the only effect of this policy has been to dramatically slow down oil production. Brazilian shipbuilders have been unable to meet demand, and as international partners such as Samsung begin to pull out and Petrobras cancels contracts due to production delays, it is becoming clear that the government’s policies are backfiring.

Yet China, Japan and South Korea all imposed highly protectionist policies for many years as they set about building their own national champions. Opening up the country to more free trade and international competition would be good for consumers and for the economy as a whole, but while it would certainly force Brazilian industry to become more competitive in general, there is no guarantee that such a move would improve the country’s high-end manufacturing capacity. Mexico has embraced free trade in order to develop its economy with very successful results, but it, too, has yet to produce a national car brand. Neither protecting the economy nor opening it up is sufficient to become a high-income country.

What Brazil truly needs to develop its innovative capacity is to both shrink its government in areas where it is strangling domestic industry and to expand it in areas where it can serve as a useful partner for promoting productive investment. Shrinking the government will involve reducing red tape through public administration reform, tax reform and labor reform. Expanding the government will involve massive increases in investment, requiring more financing and better execution to improve infrastructure, build a skilled labor force, and promote research and development. It will also require the government to be more proactive in supporting start-up industries (the Chilean government, for example, offers seed funding for promising entrepreneurs and has a very favorable visa regime to attract potential innovators) as well as providing smart subsidies and favorable policies for certain strategic industries (the U.S. and Chinese governments, for example, have done this for renewable energy firms and other key sectors).

So far, there are both positive and negative signs. Major reforms have not been forthcoming, and investment is still far below the necessary levels. But the government has made some first steps in the right direction, reducing taxes on electricity and other sectors, simplifying some bureaucratic procedures, and announcing new investments in infrastructure and education. As I have mentioned before, the most promising new program is Ms. Rousseff’s Science Without Borders initiative, which aims to send up to 100,000 Brazilian students per year to study science and engineering in the industries and universities of the developed world. This is clearly the government’s boldest attempt to build the indigenous knowledge necessary to develop future high-end manufacturing capacity. We will have to stay tuned to see if the government is able to implement other big initiatives to move the country forward on this front.