Brazil and Latin America's next challenge

Protesters in Sao Paulo Protests have spread throughout Sao Paulo and Brazil's other major cities

Large-scale protests in Brazil have rocked one of the largest and most prominent emerging economies.

On the face of it the cause is a small rise in bus fares, which has mushroomed into a range of complaints - including corruption and a lack of investment in social services compared with spending on the World Cup and Olympics.

The real cause is likely to run much deeper.

Brazil's economy has slowed down considerably over the past year, expanding by less than 2%. It feels worse by comparison with a strong decade of growth - helped by the commodity boom of the 2000s - and relatively low inflation.

For years Brazil has been feted as one of the major emerging economies - one of the fabled Brics, alongside China, India and Russia.

To top it off, it was chosen to host both the football World Cup and the next Olympics.

When the money leaves

Brazil became a destination for money seeking a better return.

Its key interest rate has averaged 8-10% in the past decade, which has offered the highest returns in the world (after taking into account inflation) for many of the years since the global crisis.

This inflow of foreign money and the country's success selling commodities led its currency to surge, which helped to keep a lid on inflation (although it did pose other problems).

But, now the picture has changed. With a few words, the Fed chairman, Ben Bernanke, has raised the prospect that the US central bank's cheap cash injections - which have fuelled billions of dollars of inflows into emerging economies - could begin to taper off in the next few meetings.

This has caused money to leave emerging economies (see my posts on the Great Reversal part I and part II). And Brazil has been hard hit.

The country's stock market has fallen by more than 20% and become a bear market. Its currency, the real, hit the weakest level in four years, at around 2.14 per US dollar.

This cheaper currency makes imports more expensive and tends to be inflationary. So much so that the central bank has just raised interest rates to combat price rises - despite the slowing of the economy.

It's a difficult economic position to be in.


Plus, when growth slows, the signs of fracture become more apparent.

One of the enduring difficulties for Brazil and other Latin American countries is that they have the most unequal societies in the world.

As measured by the Gini coefficient - where 0 is perfect equality and 1 means that one person has all of the money - Brazil's inequality has fallen during the past decade. But it remains above 0.5, which is the wrong side of the 0.4 level that is associated with instability.

Perhaps Brazil is now confronting the next challenge for these successful emerging economies that have grown well during the past decade or so.

There are now more than 130 million people in the middle class in Latin America (and I'll be writing more about that in my post tomorrow). This larger middle class tends to demand more from the government, particularly social services and re-distribution of income.

Brazil - and other countries - are likely to find that it is easier to satisfy those demands during a boom. It's much more challenging now.

But, with the worst protests on Brazilian streets in decades, it may be that this is the right time to grasp that potentially painful nettle.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 24.

    At 36% of GDP, federal taxes are already the highest in Latin America and these are mainly spent on opulent disbursements to purchase votes. Benefi the minimum wage, calculated by adding the previous year's inflation to the DGP growth of the year before that. Since Rousseff is committed to this until 2015, a continuing loss of competitiveness is inevitable and the one-third probability of a down

  • rate this

    Comment number 23.

    problems in Brazil, not only questions the possibility of corruption, good public services, but rather indicates the condition of the people who want a deeper change, economic conditions they experienced. protest against the high price of access to transport, shows that people feel is not fair to take advantage of the government's stance that the world cup event only to seek profit.

  • rate this

    Comment number 22.

    Be it Brazil, Russia or any of the 'next' countries to aspire for developed status, the issues are the same. What belongs to everyone is being shared solely by an elite class desperate to cling on for as long as possible.

    In the end, the protests will get louder and the rumblings of those hungry stomachs will be heard:

  • rate this

    Comment number 21.

    I too live in Brazil and have my own business. I have watched for many years as prices have just continued to grow, but unlike my experience in other countries where businesses run fine profit margins in difficult time, those selling pass the cost to the buyers. Prices are ridiculous. Private education is the worst with few 15yr reaching standards of public school in Europe.

  • rate this

    Comment number 20.

    Thank you again for your address of inequality, "one of the enduring difficulties", for 'other individuals' & 'certain groups', for divided societies & the world as a whole, so back to the individual, denied belonging, denied security, driven to desperate measures - fearful then greedy - to 'get ahead and stay ahead', to practice AND TEACH to vulnerable others, the way of the bully & tyrant

  • rate this

    Comment number 19.

    There can be no hope for any country that has adopted our failed system of banking, the people and the country will be used as the financiers see fit.

    The Brics politicians have been bought off the people and land will be used and abused in the same way as we see elsewhere in pursuit of money.

  • rate this

    Comment number 18.

    They need to develop their 4th estate. So that their politicians can tell everybody there what to do.

    No point looking towards us because we are too far away.

    Both in terms of miles and in terms of culture.

    It could be that they will have to work out how to exist on their own.

    Something the West has spectacularly failed to do.
    We just don't know it yet.

  • rate this

    Comment number 17.

    As my point approaches. We should delve back in to chaos and 'beggary' to find equal partnership as a lower point is needed to bring all up to equal. As those at the coffee bar are not going to go quietly to bring others up to a livable quality. The years of economic miracle enabled many but they were/ are loathed to share and wash their hands, repeat & rinse. Cry for the poor, no! let chaos ensue

  • rate this

    Comment number 16.

    We inherit our 'selves', giving families, & our "organised" infrastructure, and we build on our inheritance - usually with much help - developing the strength and ambition by which some, with luck, will 'succeed mightily', others 'just make it' as workers & parents, and many - for many reasons - pay heavily for the 'freedom' we 'share', to trample the queue. Better to START equal

  • rate this

    Comment number 15.

    Beggary and crime are the growth industries. Being equal with someone from NottingHill or someone from the jungle in the DRC? The 'deserving' have had 50 years of services and they have helped themselves at the cost of many many others, even if 4000 miles away. Greed and malice or is equality only for those organized enough to rinse it?

  • rate this

    Comment number 14.

    Don't be too hard on Brazil. It's corruption and social imbalances are no worse than those of the other BRICS - perhaps less so (think of India and Russia!).

    No - the more fundamental problem is that the BRICS are all economically modernizing but still lack the essentials of an open society. This is unlikely to change for centuries. More sweatshops & more official atrocities on the menu...

  • rate this

    Comment number 13.

    That's how the system works. You get the population into so much debt that they can't pay it back, you are then in control of the whole country, government included. How do you get a return on your decades of 'cash injections'? Why, you steal the countries resources at bargain basement prices because your own resources are exhausted.
    Note: don't mention that your own country owes $16.5 trillion

  • rate this

    Comment number 12.

    'service withdrawa to sharpen minds'
    Progress is likely always to depend on unlikely alliances, between rich (with time & means & conscience) and poor (with qualities of leadership & non-vindictivce intelligence). The would-be free-loader deprived of 'entitlements' to inherited wealth & traditional reward & public services, no doubt would tire of beggary & crime. Hardly a necessary training!

  • rate this

    Comment number 11.

    @10. The generation that suffers and creates these services, and therefore values the creation are idd to be praised. The generations after learn to abuse the system and rinse the value of their fellow 'shareable' beings. I advocate that when this point is reached a period of complete service withdrawal would sharpen our minds towards each other. I suggest that suffering brings the best.

  • rate this

    Comment number 10.

    "not a massive State"?
    States are "massive". They emerge - to stand 'the test of time' - against internal doubt, internal strife, external attack (unless shielded by more massive)

    Our rational - shareable - choice, is not for subsistence farming ("see how people get on", with social re-evolution). Any necessary population restraint will be best (only) in security of belonging, for all, equal

  • rate this

    Comment number 9.

    In a society without respect (adult hypocrisy, childhoods wild, schooling often in hopelessness), takes little to spark 'riot', only 'adult influence' to corrupt prefects & police, from 'keeping order' to stoking challenge

    Add fuel of alcohol, spark of grievance, on top of accumulating anger of groups by accident or discrimination put in fear of each other. Price of inequality

  • rate this

    Comment number 8.

    @7. This is where we diverge. I see peaceful, wealthy ppl not attaining 'equal partnership' but choosing greed and malice. I advocate a long period of DO IT YOURSELF, then ppl will come to love what was lost. Greed blinds the spirit, can you argue with this considering the economic position we now find ourselves? Let ppl help ppl through choice not a massive State Apparatus, see how ppl get on!?

  • rate this

    Comment number 7.

    No @6
    Remember Rumsfeld: we don't even know 'all the things' about which we know too little, not even about ourselves, let alone about those we may come to love, or the community and its immense unknowable infrastructure, whose loss we may come to mourn in extremis, many without knowing their own part in such loss, in blind rage as ever to blame 'others'. Very good to have Linda's direct analysis.

  • rate this

    Comment number 6.

    Public Sector. Aye everyone doesn't understand we create a Society they all want back 'what I've put in'. As it is at the moment it works for many, use it for need, but on a blooming scale ppl are using it for their wants as they shout the loudest. The NHS needs scrapping not due to cost but due to the expectations of the ppl, I will be happy to pay for what I use. Ppl ruin ppl.

  • rate this

    Comment number 5.

    @3 philstar78
    Brazil could be one the largest oil producers in the world.
    use this future wealth wisely ...not like here in the UK.
    it sounds as if you have debt and public sector problems similar to the UK, which is frightening to me, as after speaking to people in Europe, Canada, Asia these seem to be global problems .


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