It predicted that never again Brazil would have double digit inflation.
It predicted that Japan would be stagnant during the 90s a the 00’s.
It predicted and urged bottom of the pyramid company strategies - this in 1994!
It predictes stock market would grow in Brazil ten times in 10 years, missed by two years. It took 12 years.
It predicted continued growth for the first time in 50 years.
It describes Brazil at it really is, other wise I would not have been able to predict the future ecomic dinamics.
It even outlines the reasons for the Crises of 2008, but in the context of the Debt Crisis of 1982, which makes perfect reading today.
I have made a shortened version of the original book, maintaining what is still relevant for today, the insights in what makes Brazil grow, and a historical first person account of the last 15 years. I have colored in red what is doubly pertinent still today. And added a NB for comments done after.
About the Author
by Joelmir Betting
"Stephen is the best scenario maker of this country. He was the only one in the 80's to predict the 10 year stagnation period we went through.
"Stephen Kanitz, is a Brazilian born graduate of Harvard Business School, were he got his MBA in 1973. He is one of the most sought after corporate speakers, he usually kicks off the yearly corporate meetings when CEOs and CFOs do their annual visit to their foreign subsidiaries in Brazil.
"In 1984, he predicted 7 lean years for the country, when the conventional wisdom at that time Brazil's problem were over. They were not.
"In 1993 Kanitz has once again been contrarian, predicting a new economic plan would finally bring inflation down , which became in 1994 the Plano Real. Ten out of every ten economists, including illumiaries such as Rudigger Dornbush, predicted that the Real Plan would fail in 12 months. Kanitz was the only one to predict that inflation was gone for ever, to invest in new capacity, that the markets to be in were the low income and lower end of the product lines".
Chapter 1 —The Growth of the Seventies
Good news is no news, goes a saying in journalism. So if reading newspapers is your source of information on Brazil, you are badly misinformed. There are a lot of positive things going on in Brazil , and the basic theme of this book is that the positives are finally getting the better hand over the negatives, which obviously still exist.
The argument is not that all Brazil 's problems are over, but that they are going to be growth related problems and not inflation related problems.
Businessmen will still not have a dull moment in Brazil, but this time around they will be working on problems they actually can solve, not reacting to situations put to them by dozens of inflation plans.
Brazil will become a very exciting place to do business again, and though resumed growth is good news, it will be accompanied by fierce competition, something that, to be honest, not all Brazilian businessmen are used to.
What would your views on marriage be if you were to exclusively read the opinions of ex-divorcees on the subject? One of the main sources of economic journalism in
Brazil comes from ex-Finance Ministers and ex-government economists. They all have recently failed in curbing inflation, and many were fired. Failures in fact, and they never tend to have a positive outlook of the economy, just as a divorcee does not have a positive view of marriage.
What I will illustrate is namely that:
(1) Many of Brazil 's problems were exaggerated, though they were true
(2) Many of Brazil 's problems were not self inflicted, but came from abroad, such as the oil crisis
(3) Many of Brazil's problems solved themselves, without our intervention
(4) Many problems were actually solved by businessmen and government;
(5) Many problems have not been solved, but resumed growth will do wonders in solving them at least partially;
(6) The end of inflation not surprisingly has created something around of 30% idle time in Brazilian decision makers, which can now be used to solve other problems than inflation.
To understand today's economies one must analyze a country from the bottom up, not from the top down; we no longer start with the Minister of Finance and his economic policies. Pedro Malan, Minister from 1994, is one of the least known members of our cabinet, and hardly ever is in the news. To many of us, that’s exactly how it should be, meaning that finally government is getting off our backs. Ninety percent of Malan’s time was spent saying “no”.
Brazil has undergone profound changes in the last ten years that are not shown clearly in economic statistics.
This book sees Brazil through a prism of productive organization, as if the country were a large company, and from that, we discover curious things, such as, for example, that the country is not a large country buried under the weight of its own debts, as IMF economists have insisted on saying for over ten years. We owe very little in relation to our net worth.
Brazil's debt to equity ratio is less than 4%.
The Brazilian economic miracle — as the country's cycle of greatest prosperity during the 70's became known — was actually the miracle of growth with cheap financing. Money shrewdly attracted by state-owned companies and also by private enterprises came from savings available in more prosperous countries at 3%-per-year loans, at the fantastic rate of US$ 15 billion per year over more than ten years.
The surge in growth of most of the wealthy countries took place in the mid-1800s, at a time when mechanisms for raising capital, such as euro dollars, were nonexistent. The capital that financed development was generated at great costs from internal savings. This process of internal accumulation— harshly criticized by Marxist thinkers, who saw it as one more form of capital exploiting labor— was the only model available to countries like England and the United States during their process of industrialization.
In Brazil, new mechanisms such as Resolution 63 and Resolution 4131, in the sixties, opened the doors to international cheap savings.
Starting in 1964-65, capital became available directly through bank loans from funding generated by saving deposits in London and New York , which yielded 3% interest per year, after discounting inflation. One of the big mistakes of most debt plans was the disregard of the funding angle of the question. Most economists simply forgot that foreign banks were mere intermediaries of debt, and that from an economic point of view the lenders where the investors at large. Would any of them agree to receiving 25% of exports, or debt-to equity plans, and other variations on the theme, as many proposed? Not likely.
For the first time in its history, Brazil had access to very cheap money, with no strings attached, other than the loan covenants. State-owned and private companies invested these resources at the same returns of between 20% and 25% per year; the difference between the 3% paid and the 25% earned, remained in the country. Basically, we grew by replacing Marxist value-added by financial value-added growth. It is interesting to note that Brazil (if you want to use leftist rationale) rather than exploiting its own labor force, ended up exploiting, if you wish, old ladies in London, small investors, and a few Arab sheiks who were content with 3% interest per year.
Loans with relatively simple covenants made it easy for companies to grow. A multinational's subsidiary, when it brings capital from corporate headquarters, also imports a management body and external auditing, an advertising agency and a preferred courier, in addition to restrictions and limitations such as mandatory periodic consultations with its headquarters abroad. A foreign loan, on the other hand, requires only payment of interest every six months and a few covenants.
We then embarked on a period of fabulous growth. A large part of the Brazilian public opinion mistakenly views any process of indebtedness as negative, not taking into account that low-interest debt is the best thing that can happen to a country. What is inadvisable is running into debt at sky-high interest, at rates of up to 25% per year, as was the case in 1992-1993 with local loans.
One of the most significant indicators of the 1970's cycle of prosperity is labor productivity, which grew steadily during the seventies as compared to the conspicuous stagnation of the eighties, which Brazilians call the lost decade.
The productivity of Brazilian labor doubled during the seventies, stagnated during the eighties and will double again by the year 2005.
The best way to increase a worker's productivity is to supply him with more advanced — and therefore more expensive — equipment. There is a visible connection between the capital invested in labor and productivity. A Brazilian worker generates an average revenue of US$ 98 thousand per year against US$ 250 thousand generated by a US$ 98 thousand.
In line with a productivity rate almost three times greater, almost three times as much is invested in a U.S. worker, US$ 265 thousand versus an average of US$ 97 thousand invested in a Brazilian worker (see Chart 3), an amount which includes items such as equipment, machines, warehouses, and inventory, among others.
A Brazilian worker is in fact as "productive" as his American counter-part; what he lacks is investment in more modern equipment.
Greater productivity of a U.S. worker is directly proportional to the greater capital invested in him. A closer examination of the figures in these two charts shows that a Brazilian worker is as competent as a U.S. worker, since he produces nearly the same amount, proportionately. What he lacks is modern machinery to improve his level of productivity and to permit his wages to rise three — or fourfold, affording him an income on par with the more advanced countries.
Such figures are impressive. If we want to generate first-world jobs — as proposed by ex-President Collor — we need to invest, on the average, US$ 290 thousand for each new job generated. Considering that 1.5 million people come into the market every year, we would need to invest US$ 435 billion yearly.
These, however, are first-world figures. The parameter for the 500 largest Brazilian companies shows a cost of US$ 98 thousand for each new job, in terms of equipment, facilities, and inventory—requiring an annual investment of US$ 147 billion. It is still a very high figure to be financed entirely from domestic savings.
Not all new jobs in the Brazilian economy will follow the standards of the 500 largest companies in the country. Many of these 1.5 million jobs will be generated in the informal economy, or in smaller companies, where investment is much lower — from US$ 20 thousand to US$ 48 thousand per worker.
Buying a job will be the trend for the future. It is already happening in franchising.
This trend will place a heavier burden on parents. It will no longer be enough to provide a child with a college education to assure his professional success; parents will probably have to obtain the US$ 98 thousand initial capital so the child can work. Buying a job will be a trend of the future; in the franchising movement, it has become usual for parents in Brazil to buy their children a small franchise or business.
In the seventies, Brazil invested steadily in workers, with the inflow of money from abroad. Because of these factors, from 1936 to 1976 we grew faster than Japan.
Brazil lost its position to Japan only because Brazil went through a stagnation period, the lost decade of the 80's.
Another aspect that should be taken into consideration is the broad industrial base installed in the country, as a consequence of the import substitution policy implemented in the seventies. Prohibitively high import tax rates and protective policies spurred the country to start producing all kinds of goods for a practically captive market. Unlike the Japanese, who specialized in some areas such as electronics and automobiles, Brazil has an industrial complex which comprises no less than 32 sectors.
This is a paradoxical situation since it contradicts the precepts of modern economy on one hand, precepts that recommend performance focused on few sectors; this broad industrial base might, on the other hand, leverage economic growth.
The drawback of this widely atomized industrial base is a business structure which concentrates only two or three companies or competitors in each sector, resulting in sector oligopolies. In the long run, since companies that face no competition do not renew themselves as often as necessary.
The opening of the economy to imports will go a long way in making these companies more aggressive, and we already have seen some great comebacks during 1991 to 1993.
Read the following chapters: