Bloomberg News

Brazil Faces New Curse as the World’s Resource Engine

March 13, 2012

Petroleo Brasileiro SA's P-51 oil platform stands in the Marlim Sul field, at the Campos Basin, about 150 kilometers off the coast of the state of Rio de Janeiro, Brazil, on Friday, July 15, 2011. Photographer: Rich Press/Bloomberg

Petroleo Brasileiro SA's P-51 oil platform stands in the Marlim Sul field, at the Campos Basin, about 150 kilometers off the coast of the state of Rio de Janeiro, Brazil, on Friday, July 15, 2011. Photographer: Rich Press/Bloomberg

In 2007, Brazilian geologists made the biggest oil find in the Americas in three decades. Buried more than five miles below sea-level, the discovery was estimated to raise the country’s crude reserves by 62 percent.

Brazil was already the world’s natural resource powerhouse: its biggest exporter of coffee, sugar, orange juice and beef. The prospect of it becoming a major energy power as well prompted then-President Luiz Inacio Lula da Silva to declare amid a rush of patriotism that “God is Brazilian.”

Brazil has struggled for half a century to break its dependence on commodities, grappling with the so-called resource curse. Depending on how profits are managed, the new oil wealth could be a godsend that drives a new era of development or a burden that holds the nation back, said Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc. in New York.

“They can be Norway, or they can be many other countries where oil did not bring growth and development,” Ramos said in a telephone interview. “You’d better be smart and forward- looking about using it, otherwise it might hurt you.”

Demand for food and metals for an industrializing Asia has tripled commodities prices in the last decade, helping Brazil overtake Italy and Spain to become the world’s sixth-biggest economy. Higher prices for Brazilian iron ore and soybeans, and an almost sevenfold rise in foreign direct investment, has helped the real double over the same period, making it the best performer of 163 currencies tracked by Bloomberg.

Widespread Benefits

The benefits of the resource boom are widespread. It helped millions of Brazilians out of poverty and drove down the country’s net debt to 37.2 percent of gross domestic product, from 60.4 percent. Germany’s debt-to-GDP ratio is 83.2 percent.

Still, commodity price swings can be volatile, making resource-rich economies vulnerable, and efforts devoted to commodities can stifle growth elsewhere. Most productivity growth in a developing economy comes from manufacturing, not agriculture or resource extraction, said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London.

Brazil’s industry has contracted for three straight quarters, limiting growth to 2.7 percent growth last year, the nation’s second-weakest performance since 2003.

“One of the consequences of very, very strong resource-led growth is that non-resource sectors tend to get squeezed,” Shearing said in a telephone interview. “It is possible to get rich and be a big commodities producer, but it’s far more difficult.”

Easy Riches

The countries that have been most successful in developing their economies in recent years have mostly done so without the easy riches of commodities, Shearing said. Of the nations that joined the Organization for Economic Co-operation and Development since 1995 -- the Czech Republic, Hungary, Poland, South Korea, Slovakia, Chile, Slovenia, Israel and Estonia -- only Chile is a large exporter of raw materials.

Since colonization by Portugal in the 16th century, Brazil’s economic development has been a series of boom and bust. It started with the country’s namesake Brazilwood, a tree used for making dyes, followed by sugar, gold, rubber, cotton and coffee. Beginning in the 1970s, Brazil’s vast savannah grasslands were turned to soy cultivation using new crop strains, advances in soil management and pest control.

Brazil began efforts to break its dependence on commodities by promoting industrialization behind a tariff wall in the 1950s and 1960s, said Werner Baer, an economics professor at the University of Illinois and author of the book “The Brazilian Economy, Growth and Development.”

Argentine Economist

Governments at the time were influenced by Argentine economist Raul Prebisch, who argued that raw materials prices would fall relative to manufactured goods, limiting Latin American countries to a state of sub-development, Baer said.

“Not only in Brazil, but in much of Latin America, industrialization was justified on the basis of long-term weakness of commodity prices,” said Baer, who oversaw Brazilian central bank President Alexandre Tombini’s doctoral thesis about inflation and financial instability.

Even after decades of trying to reduce dependence on commodities, Brazil’s biggest exports in 2011 were iron ore, crude, soy, sugar cane, coffee and chicken, according to Trade Ministry figures. The country’s customer base is growing. In 2009 China overtook the U.S. as its biggest customer.

The rise in commodities prices has lifted Brazil’s equities to 2.73 of total world capitalization on March 12, from 0.7 percent eight years ago, as companies such as Vale SA (VALE3), the world’s biggest iron-ore miner, and BRF Brazil Foods SA, the biggest poultry farmer, benefit from higher prices. Brazil’s state-controlled oil company Petroleo Brasileiro SA (PETR4) is also now the world’s fifth biggest oil company.

Manufacturing Lags

The downside of this has been the country’s lagging manufacturing sector, said Capital Economics’s Shearing. President Dilma Rousseff has repeatedly expressed concern about how the strengthening real is hurting exporters by making Brazil’s goods more expensive. Last week she pledged to take all necessary measures to shield the economy from a “monetary tsunami” of weak currencies in Europe and the U.S.

Finance Minister Guido Mantega has intervened to try to protect Brazilian industry, including tax breaks for local producers and measures to weaken the real and shield the textile industry.

The real must decline by 20 percent to be “sustainable,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview in London yesterday.

Even with soaring raw materials prices, last year Brazil fell to 84 out of 187 countries on the United Nation’s Human Development Index. The ranking is based on gross domestic product, health and education level. The country was 73 out of 173 countries in 2002.

Oil Royalties

The prospect of oil royalties has already sparked a battle in Congress over how much money Brazil’s oil-producing regions should share with the rest of the country. In 2010, Lula vetoed an amendment that would have divided the revenue among all states and cities following opposition from producer states. During her 2010 presidential election campaign, Rousseff pledged to use Brazil’s oil wealth eliminate extreme poverty.

“If they can use the revenue relatively rationally, and invest it for long term, the prospects would be pretty good,” said Professor Anthony Pereira, director of the Brazil Institute at King’s College, London, in a phone interview. “The resource curse isn’t inevitable.”

Read the full Special Report, click here. Read more energy & sustainability news, click here.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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