Fuelling the fire of destruction

Brazil’s government must end corruption, improve education and develop infrastructure if it’s serious about achieving ambitions on the world stage

 
Protests sparked by the rising cost of public transport plagued the country this year, quickly developing to include larger issues such as education, infrastructure and corruption
Protests sparked by the rising cost of public transport plagued the country this year, quickly developing to include larger issues such as education, infrastructure and corruption 

In the build up to the Confederations Cup, university students gathered in São Paulo to show their discontent about the 20 cent hike in bus fares, raising the price to R$3.20 ($1.47). They were met by the country’s infamous Military Police who confronted them with rubber bullets and pepper spray.

Videos from mobile phones quickly broadcasted the brutality to the rest of Brazil via social media. Soon, the streets of São Paulo, Rio de Janeiro and major cities across the nation were flooded with demonstrators. What began as a peaceful demonstration against the increasing cost of public transport boiled over and drew attention to wider issues affecting the country and its future. The state of the nation’s public education, infrastructure and battles with corruption throughout its history threaten to derail its economic progress.

A riot squad wait on streets near the Maracana Stadium in Rio de Janeiro shortly before the final of the FIFA Confederations Cup in June this year
A riot squad wait on streets near the Maracana Stadium in Rio de Janeiro shortly before the final of the FIFA Confederations Cup in June this year

Privately owned profit
Concerns about Brazil’s bus lines and metro system are not purely to do with the cost of a ticket. The real issue is that they are owned by a plethora of private companies. This lack of public ownership means that profits made are not being reinvested into the transport system, which has drastically affected the quality of the service.

Brazil recently overtook Britain to become the world’s sixth-largest economy. To stay there the country will need to invest in its young people

Its buses and metro service have grown increasingly crowded, unreliable, expensive and dangerous. The protests forced President Dilma Rousseff to set aside R$50bn ($25bn) for public transport in an effort to calm civil unrest and hold on to her 79 percent approval rating in the polls. She also gave a stern warning against any repeat performances of the violence and vandalism, which blemished the otherwise peaceful protests.

Though the protests in mid-June may well have been successful in squashing the price rise proposed by the government, growth forecasts for the first quarter of 2013 grew by just 0.6 percent (2.4 percent annualised), falling well short of what recovery analysts had hoped. This means that government subsidies to improve funding for Brazil’s beleaguered buses and trains, although promised, are unlikely to be fulfilled and more unrest seems inevitable.

Brazil recently overtook Britain to become the world’s sixth-largest economy. To stay there, the country will need to invest in its young people. As the country’s economy continues to modernise and grow it is going to need well-educated, well-trained professionals if it hopes to compete in the global marketplace. According to the Brazilian Education Ministry, only 17 percent of 18-24 year olds are enrolled at higher education establishments.

Although the figure is lower when compared with other developed nations, that number is a considerable improvement when contrasted with seven percent recorded in 1997 when The University of São Paolo was its only entry in the Times Higher Education World University Rankings, just making the list at number 178 out of 200. With more and more jobs being replaced by automation, the number of unskilled roles is shrinking across the globe and Brazil is no exception.

Without proper investment into its public education, it will have trouble filling semi and high-skilled posts in the future. “If there’s not real and meaningful education reform, Brazil could be left in the dust,” said Antonio Frets, member of the Brazilian Academy of Education. It is easy to blame a lack of funding as the primary cause for the country’s education deficit.

In fact, the country spends approximately five percent of its GDP on education, which is a similar level to EU leader Germany. Rio’s Rural Federal University is one example where the lack of funding cannot be blamed. The university has seen its budget increased considerably in recent years, rising from $7.4m in 2005 to $173.5m in 2012.

“Here we’ve got professors who aren’t teaching classes because there aren’t adequate facilities. Repairs are started but never finished and buildings are getting ruined,” said Gustavo Perreira, a fourth-year law student at the university. “The university is falling apart but it’s not a problem of a lack of resources. It’s that those resources aren’t being applied as they should.” This has led students and faculty to speculate that corruption within is to blame.

Its primary budget surplus (excluding interest payments on outstanding debt) is shrinking and government debt still rises. President Rousseff was elected in 2011 pledging to stimulate growth by increasing public spending and increasing minimum wage. She also forced state-run banks to lend more. This, of course, led to increased inflation, but rather than tackling the problem through the long-accepted method of raising interest rates, the President chose to cut sales taxes. “Our philosophy is lowering taxes to reduce companies’ costs,” Finance Minister Guido Mantega said.

It did little to stimulate growth, but did have a big impact on the inflation index leading to a price increase on everyday items like food and petrol. Though the government has attempted to stimulate spending through consecutive increases to the minimum wage. Inflation’s continued rise coupled with Brazilians’ average household debt rising to 43.4 percent of annual income at the end of 2012 has meant that many citizens are choosing to set aside more of their disposable income to pay off debt.

Members of various unions take part in a demonstration in front of the national Congress in Basillia, Brazil
Members of various unions take part in a demonstration in front of the national Congress in Basillia, Brazil

Crude investment
What Brazil needs now is not more consumption, but greater investment. The country is set to auction off two-thirds of its oil reserves, hoping that it will inject some much needed money into its sluggish economy. The Libra field – Brazil’s largest oil discovery – will be auctioned on October 22 in Rio de Janeiro. The plot lies in the Santos Basin off the southeast coast and has reserves of up to 12 billion barrels of crude.

The winning bids will be determined by the slice of profit the bidders are willing to offer Brazil’s government. However, there is an interesting stipulation with regards to the auctions, which is that Petrobras – Brazil’s semi-public oil giant – will be the operator and must own at least 30 percent of the fields. For the auctions to be a success, bidders will need to accept the conditions at a time of weakened oil prices brought on by increased output by shale-oil fields in the US.

Brazil will also be vying for investors’ attention against other heavyweights in oil and gas such as Iraq, India and Sri Lanka. The government will need to make the choice between providing more appealing offers to investors and protecting their control over valuable assets. One thing that is certain is that if they can obtain some strong sales at auction, it will boost private sector confidence and lead to more investment in the future. More importantly, it will provide some much needed cash, which can be used to upgrade infrastructure that is in dire need of reform.

Bernardo Figueiredo, Head of government infrastructure agency EPL has said that Brazil needs to raise the level of investment in infrastructure to at least BRL 80bn ($35.5bn) a year, with at least half of that coming from private investors. In response, the country began auctions to sell off major infrastructure contracts in order to gain the capital it needs to upgrade its substandard roads, railways and ports.

Private investors have already snapped up three of the country’s largest airports and the government is hoping it will be able to sell off Confins International, Belo Horizonte and Galeo Airports later this year. Auctions went ahead last year for the operating rights to Viracopos Airport in Campinas, Guarulhos International in São Paulo and the international airport in Brasilia, which helped to secure a decent portion of the RBL 80bn Brazil needs. The three airports fetched a total of BRL 24.5bn ($10bn).

The opposite effect
The protests have made it clear to the government and potential investors that Brazil is desperate to fix its mounting transport problem. As a result, the government has had to entice investors with sweeter returns on their investment. The government recently increased the rate of return on the planned BRL 34bn ($15bn) bullet train from Rio de Janeiro to São Paulo from 6.32 percent to seven percent in an effort to attract bids.

Corruption has slowed the pace of economic growth for the BRIC nations and the cost can be immense

The Chinese have said that they would be willing to help in eliminating the logistical problems posed by the country’s poor infrastructure, which can make the cost of doing business with Brazil expensive. Systemic inefficiencies in the economy, caused by poor infrastructure and extensive corruption have contributed to what is now known as The Brazil Cost. This has deterred investors.

In particular, corruption has been a huge hindrance to economic progress. It was estimated that in 2008 it alone cost the country $40bn (2.8 percent of GDP). Corruption has slowed the pace of economic growth for the BRIC nations and the cost can be immense.

Russia and India’s economies are plagued by it. It is estimated that it cost Russia about $300bn a year, which works out to 16 percent of its GDP. Over the last decade in India, nearly $345bn has been lost. These emerging economies lose out, not just in terms of money and reputation. Government swindling forces taxes to increase on investments and decreases the quality of their countries’ already substandard infrastructure.

In Russia, it has stifled development of efficient markets. Brazil has faced multiple scandals itself and must confront similar problems. Politicians and bureaucrats have been all too willing to take bribes in exchange for awarding public contracts. Most harmful of all is the perception that this creates among the international community.

When combined with its lack of infrastructure, The Brazil Cost is a huge reason why the country has struggled to find the investment it needs. For a country which has steadily advanced its economic output, such damaging behaviour cannot be afforded if it is to fulfil its potential on the world stage.

During a meeting in Brasilia, President Rousseff responded to her citizens: “The streets are telling us that the country wants quality public services, more effective measures to combat corruption… and responsive political representation.” She may know what her country needs, but she will struggle to find the tax revenue required to deliver on their demands.

With the economy struggling to find firm ground, interest rates make credit more costly, rising inflation and average household debt each year is forcing many to save rather than spend. The future is still uncertain for South America’s biggest player. For the Brazilian miracle to be fully realised, the country needs economic growth and greater stability for its people. The strides it has made are impressive, but if more is not done to tackle the problems, instability is inevitable.