Weathering the Storm

Brazil's commitment to fight inflation signals an end to a history of false starts. In the 1950s, when bossa nova was on the world's Victrola, the ambitious civilian President Juscelino Kubitschek laid out a rosary of huge public works to make the nation grow "50 years in five." (Brazil boomed; so did prices.) In the early 1970s, the Brazilian miracle saw GDP grow by double digits under the marching orders of military leaders, which set the stage for hyperinflation. "Fifteen years ago, there used to be great debate about what to do," says Albert Fishlow, a Brazil scholar at Columbia University. "Today 90 percent of economists basically agree, and people sit down and talk about strategies for development instead of searching for miracles."

Brazil's new consensus marks the end of five centuries of state rule over the economy, and the emergence of a new private market economy. In 2007, Brazil hosted a record 75 initial public stock offerings, trailing only China, as companies including ethanol distillers and tech start-ups raised rivers of cash. The stock exchange itself, known as Bovespa BM&F, went public last October, raising $3.7 billion, one of the biggest initial public offerings of 2007. Now the São Paulo stock market has eclipsed the giant state development bank BNDES as a source of cash for new businesses—a telling symbol of a country still molting from command and control to a market democracy.

Rising market competition acts as a defense against the return of inflation. This onetime drowsy rural nation now has one of the most diversified economies in the developing world, exporting iron ore, steel and soybeans, but also small commercial jets, banking services, custom-made buses, fine paper and equipment for air conditioners. Three years ago, Embraer overtook Canada's Bombardier to become the world's largest maker of midsize commercial jets. Now Brazilian-Belgian InBev is poised to become the world's largest brewer after closing a deal to buy the American giant Anheuser-Busch in mid-July. The globalizing economy has helped drive up productivity growth, to more than 3 percent a year since 2002 and now accelerating. And productivity growth is what allows a nation to make more profits—without raising prices. Brazil is now the world's leading exporter not just of coffee but soybeans, beef, sugar cane, ethanol and frozen chickens.

Caging the inflation threat has also won Brazil a new standing in the financial markets. Fitch Ratings and Standard & Poor's recently elevated Brazil's debt from junk to investment grade. Brazil's foreign reserves have risen from $16 billion in 2002 to more than $200 billion. The Brazilian real has climbed 20 percent against the dollar in the past 12 months, outperforming all of the world's most-traded currencies. Brazil attracted $35 billion in foreign direct investment in 2007, doubling the figure from the year before, and is set to pull in more foreign direct investment than all nations but China in 2008. "We are giving Brazil one of our best weightings," says Mark Mobius, head of Templeton Management Fund, with $5 billion in Brazil. "Brazil is in a good position moving forward."

Brazil's reputation has shifted so completely, many analysts now find favorable ways to compare Brazil with the other BRICs. While the booms in China and India are driven by poor peasants fleeing farms for factories in the city, Brazil's demographic revolution started decades ago; 85 percent of the country's 190 million people now live in cities. The result is potentially less dynamic, but already richer and more stable. The per capita income of $8,450 is far higher than in India ($1,100) or China ($3,000). Russia, with more than $12,000 per capita, is richer, but that is due almost entirely to the recent oil boom. Brazil is also the only BRIC country with both an established democracy (like India) and no rebel province equivalent to a Chechnya, Kashmir or Tibet. "In Brazil, progress is steady but slow," says economist Marcelo Neri, at the Getúlio Vargas Foundation, a leading business school. "It's like the fable of La Fontaine about the worker ant versus the noisy cicada. This is more a country of ants than of cicadas."

Brazil is still on the mend. Red tape, crumbling infrastructure, a chaotic public-health system and widespread illiteracy all threaten Brazil's competitiveness. With his rock-star ratings, Lula still has the clout to push the reforms the country needs. Until now, with the wind at Brazil's back, he hasn't had to bother. But banking on luck instead of reform is no business plan in the global economy. For Brazil it could be the difference between finally taking off and merely flapping in the wind.

© 2008