Few countries in the world combine all the preconditions necessary for rapid growth as Brazil, with the notable exceptions of China and India. (NB. This book was instrumental in including Brazil as a Bric, the original idea was the RICh future countries. A BRIC was considered a heavy burden).
Whenever the possibility of Brazil resuming its growth cycle is discussed, some problems are brought up that could act as obstacles.
Many leading economists are still pessimistic. Roberto Macedo, in an article to Estado de São Paulo, September 1994, predicted that the new generation of Brazilians would be poorer than their fathers. Roberto Campos, in his 1400 page book 'A Lanterna de Proa', predicts that the Brazilian dream would not be reached by the year 2000. Mario Henrique Simonsen predicted hyper-inflation as late as Feb. 1994, in a famous article in Exame that got readers in panic.
Many problems still confront Brazil. My argument being that the positives are now outnumbering the negatives, and that a positive cycle of cause and effect is settling in.
With the Real plan, idle bank deposits have surged, so has idle pocket money, and the government has effectively reduced its internal debt and interest payments.
In the Cruzado Plan, an important aspect was the oversight that industrial prices sold with 30 day terms, which included at the time a 16% inflation estimate. The price freeze ended up freezing prices with built-in future inflation, playing havoc with the pricing system. During March 1986, Brazilian economy stood still for one month while suppliers and clients clashed over the deflator. None of the 18 authors of the Cruzado Plan remembered this small detail.
NB. In the Brasilian version of this book I published a inflation model I submitted to Persio Arida and João Sayad predicting the end of the Plano Cruzado, with estimates of explosive inflation which confirmed to the last decimal. See article in my blog REAL ECONOMICS.
I mention all this in order to dispel the conventional wisdom that most inflation plans fail due to lack of political will. Or that they failed because economists never got the support of politicians, who destroyed their plans for electoral purposes. The truth is most plans were half backed, and had flaws in them. Conceptual flaws. Economists tend to blame politicians for their failures, not themselves.
The Real plan learned from many of the previous mistakes. The Real plan was by far the most simple and the most effective way to curb inflation.
Brazil has a first class management elite, seasoned by a hostile and constantly moving environment. With the end of inflation, they are finally finding enough time to get on with those management issues that foster growth rather than protect the company from inflation.
This time around growth will be business centered, decisions being made at the top 500 level and among small and medium-sized businesses and young entrepreneurs who are setting up franchises all over the country.
The important thing is not a vast and comprehensive economic policy but the managing efficiency of thousands of small and medium-sized companies. If these people fail in their job, then Brazil will not get ahead. But if a great economic plan does not work out, if the Constitution is not the best there is, the effect will not be the same as 40 years ago, when the world was more authoritarian, governments had more sway, and force was exerted from the top down.
The growth of the Brazilian economy will help to solve, by itself, most of this country's deficiencies, mainly its immense social debt. It is easier to maneuver a truck when it is moving than when it is standing still.
The financing is there , the ability to take on more financing is there, but will there be available income to support the new growth cycle expected for the next ten years, since there is no growth without consumption. It is no use investing billions of dollars in the Brazilian economy if the population does not have the income to make the wealth produced spread. If we look closely at some indicators in this area, we will see that there are good prospects regarding the purchasing power of Brazilians.
The first positive aspect can be found in the changes that have taken place in the profile of the population, the same population that will be responsible for this new growth cycle. In the seventies and eighties, Brazilians started to control the size of their families, which brought about a steady decline in the fertility rate. From 6.2 children per woman in 1960, we went down to 4.5 in the early seventies, to 3 in the early nineties, and projections indicate that we will go down to 2.3 or 2.4 by the end of the century. At this level, we will be just above the average rate for European countries, 1.8 children per woman.
The overpopulation threat in Brazil did not materialize. The number of children per Brazilian family is steadily decreasing.
A brutal recession in 1992 pushed down the fertility rate to 1.4 per woman, the lowest rate ever recorded in the country. Couples were not only postponing getting married, but those that did get married were postponing first born. This, of course, is a temporary statistical rate; as soon as the country starts growing once again, the fertility rate should go back up to a rate of 2.5 children per woman.
Figures indicate that Brazil has solved one of its most serious problems. The threat that loomed at the end of the fifties, of an uncontrollable population explosion, did not materialize; in fact, a decrease occurred in the fertility rate. The recessive phenomenon of 1992 will bring a familiar new consumer to those abroad: the Dinks, dual income no kids, where both husband and wife work, have an income superior to that of older couples, delay their first born and have more money to spend. This new model challenges the creativity of the marketing department of companies and of Brazilian advertising.
Reduction in fertility rates create a aging population. But in the Brazilian case that is excellent news, contrary to most countries where aging becomes a pressing economic problem.
Families reach their yearly maximum spending budget by the age of 40, when children go to college. Past the age of forty, it is all down hill, at least from a financial point of view. Average age in the USA and Japan is slowly approaching the 40's. The Brazilian average age is 23. They are just beginning to spend and earn. They are still less productive, which also comes with age, and from a spending curve view, Brazil is still much on the uphill. Obviously one cannot make a direct analogy between an average person and the whole Brazilian population, but direction is the same.
The massive inflow of women into the job market is another significant social phenomenon that took place in the seventies. The traditional pattern of the Brazilian family in which only the husband supported the home was replaced by the working couple. From that point on, women became a new and important source of income for the family. This translates into even more disposable income, a trend that is still in the making.
The end of inflation brings to a halt bank profiteering due to inflation gains , namely float - a two day float at a 2% daily inflation rate is all a banker could dream about. It is the transaction that takes a day to be debited to the client's account, it is the deposit that takes three days to be credited to a branch in the Northeast, or a whole week in Manaus. This is a direct loss for the population estimated to have reached US$ 35 billion dollars a year, calculated at an inflation level of approximately 45% per month.
This dividend of the Real plan is already having its effect. The lower income population have had a surge in disposable income just because inflation has ended. The stupendous growth in the lower income markets will be explored as a potential market later on.
The rise in the Stock Exchange does wonders to investment climate and ends up spreading to the business world as a whole.
Pessimists will at this point worry about a likely resurgence of inflationary pressures originating in production, the so-called cost based inflation. This possibility exists because the country has not prepared itself for a new surge in growth as it should. But fortunately, this time around, imports can make up for possible shortages in supplies. If there is a steel shortage, for instance, we can import the product instead of just increasing its price, as was done in the seventies.
One more source of available income, when Brazil restarts its growth, will be the profit taking in the Stock Exchanges. The BOVESPA (São Paulo Stock Exchange) index will double or even triple in the next two years and we will go through a new period of euphoria very similar to the one in 1971. That year, companies took advantage of the stock exchange boom to open their capital for the first time; as a result, we had ten years of poor performance in the stock market as companies, one after the other, opened 49% of their capital. This time the problem will not happen again because most companies have already opened their capital and, since Brazilian businessmen like to keep control of their business, there will not be a flood of shares coming into market.
The rise in the stock market does wonders for the general mood of business executives and ends up spreading to the business world as a whole. Brazilian stock market is still playing the value game, seeking grossly undervalued shares. As the economy starts picking up steam, the value game will be substituted by the growth stock game. Today's ( September 1994) average P/E ratio is around 7 times annual normal profit, whereas in the most emerging markets the average is around 25. As the average price/earnings ratio of Brazil reaches normal ratios, there is room for the market to go up threefold. Add to that the positive effect on the market due to increase in profits generated by economic growth, and we may have another doubling in the next 7 years. When you add these positive points I believe that the Stock Exchange can easily grow 6 times in a period of ten years, as long as the country's growth and stability conditions are maintained.
NB. Those of you that bought shares and earned this 6 times growth do not have to thank me, just deposit 2% of the gain to my bank account.
Feelings of euphoria stimulate business in the economy as a whole. PE (price/earnings) of Brazilian shares should go up to 30 and profit should double in the next ten years.
Foreign investments will be responsible for 35% of the Stock Exchange's daily movement.
One of the great businesses in the next few years will be mergers and acquisitions. Many a family owned business is up for sale, just waiting for corporate prices to rise to what they were in 1986. A study done by Price Waterhouse, shows that not only the market of M&A is already exploding, but that foreign buyers are already 45% of the takers, and will swiftly become the major player.
The entrepreneurial revolution in Brazil can be seen the moment you get of the plane and enter the local airport bookstore. In the early seventies, there were fewer than ten Business Administration books translated and published every year in Brazil. In 1993, no less than 150 new books on business were translated or published in this country. Even philosophical discussions such as Relevance Lost have been translated, not to mention all of Michael Porter's books. There are no official statistics on the sale of these books, but estimates indicate between 700 thousand and 1.3 million books sold per year in Brazil on business subjects; I am one of the authors an accounting textbook which has already sold half a million copies, an impressive number even in America. The number of students who seek business administration courses escalates yearly.
Brazil suffered a great deal with the economists' view of the future. I know dozens of business people who hired economic advisors, paying their weight in gold, to find out ahead of time what would happen to our economy, interest rates and inflation. Modern enterprises do not try to foresee the future; they decide to create their future. In the business world, stories abound of visionaries who could not make it, for either technical or management incompetence. None of them try to predict the future, they make it.
Understandably, most Brazilian companies concentrated in trying to predict the future, defending themselves from the next half backed economic plan. This environment is something of the past. Now the thrust is to make one's corporate future, not to predict it. Most Brazilian companies are still somewhat lost. There was no room for strategic planning in a inflationary environment. Brazil has more than 5.000 Phd's in inflationary policy, and less than 100 MBA's in corporate planning, and growth related matters.
It is not a coincidence that Japan and Germany were the most successful countries of the post-war period. The two countries were economically ruined and only one option was open to them: to establish the future to be reached and make the whole nation strive tirelessly to reach it. These are two completely different conceptions: the country that wants to predict the bad things the future has in store and try to defend itself, and the country that defines its future and knows what it wants to reach. The reign of the economist in Brazilian government is over. The end of inflation coincided with 4 Finance Ministers in a row that were not economists, Resende, Cardoso, Ricupero, Ciro Gomes.
There is a new Protestant ethic brewing slowly in Brazilian society. The Catholic church has lost market share continuously over the last 30 years, to alternative religions that adopt a more Protestant ethic, which encourages profits--as well as donations -, do not consider making money a sin, especially if part of it is sent to the P.O. Box on the left corner of the TV set.
Two years ago, the Brazilian government instituted the Brazilian equivalent of the Malcolm Baldrige Award, the National Award for Quality.
The first prize was awarded to IBM do Brasil, a foreign owed company, in an attitude that indeed surprises for its impartiality, an attitude unacceptable in the seventies for the fact that IBM is a multinational. The 1994 prize went to Xerox of Brazil, another foreign company. This is an amazing change of attitude on the part of the Brazilian government.
One of the most important changes in my view will be a change in corporate strategy. The prevalent corporate strategy in Brazil has mainly been focused on producing for the richest 10% of the population. The industrial policy of the 70's was, in a simplistic way, import substitution. Brazil started to produce products that until then were imported, usually by the wealthiest part of the population, with technology standards and degree of sophistication very distant from the average consumer. Since many companies were multinationals, most produced here the same products manufactured at their U.S., German or Japan headquarters, that is, products totally alien to the average low income of the Brazilian population.
This the frame of mind of producing goods and services suitable to the developed world re-creates the culture conveyed in most business administration books by foreign authors, which are suitable to their own countries. We started making brakes with ABS, Dolby sound systems, shopping malls paved with marble, auto-reversing tape decks and other sophistications important to the American consumer, but of questionable priority for Brazilians.
The new Brazilian industrial model will focus on low income markets. The number of rich people is decreasing.
The winning corporate strategy will target the low income markets, which should be the one with the highest growth potential in Brazil. The strategy of manufacturing and selling to the 10% wealthiest segment will no longer be successful, because the number of rich people is decreasing and also because, with economic opening, they will prefer to import, as they did in the past. Furthermore, Brazilian industry is incapable of producing a more elaborate product, nor is it able to compete with imported products, for the very fact that the segment of rich people in Brazil is very small when compared with the U.S., Europe and Japan.
NB. This was written 5 years before books about the bottom of the pyramid started to appear.
The difference between the Brazilian consumer market and that of the developed world becomes clearer when we compare a steel worker who works at the Brazilian General Motors unit -- producing Omega models year after year, without ever having the slightest chance of buying one of those cars himself -- with a mechanic who works at the German BMW, who drives to work in his own BMW, even if it is a second-hand car.
As a user of the car he manufactures, the German worker develops a more critical relationship with the article he produces during his daily routine. The slightest noise in the rear suspension of his car leads this worker to participate in the improvement of the vehicle. He will certainly look for the person in charge , in order to exchange ideas with the purpose of improving the quality of the product from then on. It is possible that in less than a week the problem may have been solved and the product improved without the company's top management ever having heard about the matter.
Apply this same situation to Brazilian reality. Only after dozens of dissatisfied consumer have complained to their car dealerships will they take the problem to the marketing director, who will then talk to the production director. Depending on the company's celerity, it will then take from six months to a year to solve the problem. In his book The Competitive Advantage of Nations, Michael Porter clearly shows that no company can win the competitive struggle unless it has demanding customers. One of the reasons for Japan's success is the extremely demanding Japanese consumer. In Japan, stores and supermarkets are open on Sundays so that their consumers will have more time to make comparisons between products.
We need to take the ABS from the brakes, the Dolby from the sound, the auto-reverse key from the tape deck and the marble from the shopping mall.
It is obvious that in this context the Brazilian industry will never be able to make products for a public in the higher bracket markets with the same competence and efficiency as companies in the developed world. Our industry must adapt its production to the country's income level. Less sophisticated products, more suitable to our reality. We need to take the ABS from the brakes, the Dolby from the sound, the auto-reverse key from the tape deck and the marble from the shopping mall.
The worker commitment, satisfaction and determination required in modern industry and high standards of quality will not be obtained from workers that do not have the slightest chance of owning the products they work their butts of every day. Those times are over.
The correct corporate strategy in Brazil will be, once again, being close to the customer. But that means being close to the average Brazilian customer, which by definition is in a totally different income bracket than most multinational managers even think about. We must change many things, starting with the basic product itself. Perhaps stripping away many technological sophistications more suitable to the developed-world consumer. Forget planned obsolescence, which leads to a stream of new models of ever-increasing sophistication.
Ninety per cent of the Brazilian population does not yet own the basic product. Sophistications are dispensable in this first purchase. If George Bush, former President of the United States, complained that he did not know what good all those keys on a videocassette recorder were, you can imagine what happens to a Brazilian consumer with his first model.
Instead of encouraging the comeback of the Volkswagen Beetle, the Brazilian government should have introduced a bicycle as the solution for its transportation problems. The VW Beetle costs between US$ 7,000 and US$ 8,000 and there are few consumers in the population who can pay this price. A bicycle, on the other hand, could cost between US$ 200 and US$ 300, a price accessible to the average Brazilian income. India has solved its transportation problem with the introduction of a motor-scooter for three. China is the world's largest manufacturer of bicycles. The Chinese have found out that the bicycle is the most suitable means of transportation for their development stage and for the income level of their population.
Packaging is certainly one of the most important items for bringing down the price of a product. Batavo, a dairy-products processing plant in the state of Paraná , launched in 1994 a yogurt in family-size packaging. The one-liter plastic bag replaced five traditional 200-gram bottles of the product. Its price dropped 50% due to the savings attained solely with the new packaging -- and it was a resounding success. Competitors immediately followed suit, since the new packaging keeps product quality unchanged.
Brazilian companies will have to re-think their channels of distribution as well. In fact this is one area that will go through enormous revolution in Brazil. Marble-paved shopping malls will certainly place the product out of the reach of the average consumer. The low-income population does not lack only money to buy more; they also lack time. That is why one cannot understand that no space has been provided for commerce near subway stations of large cities, like S_o Paulo. There is very little commerce installed next to or above subway stations in Brazil. In New York City you would not dream of building a large shopping area without direct access to a mass transportation system. The city's most famous and sought-after, Macy's and Bloomingdale's, are built next to subway stations.
It is imperative to evolve from the traditional system of sales in stores and make access easier to consumers by means of new forms of sales such as telemarketing, mail order which will boom now that catalogs with fixed prices will become possible and factory outlets, which bring down distribution costs, to mention a few.
Statistics show that by the year 2000 three-quarters of the population will belong to the low-income level.
When we have reached the point of producing cheaply and in large quantities, we will have reached the stage of being able to export, not to the developed world, but to the third world. To China, India, Greece, countries whose population profile is much closer to that of Brazil.
We need to re-think quickly the corporate strategy of producing sophisticated articles for the developed world and explore better the potential of exporting to the consumption patterns of low-income countries. Statistics show that by the year 2000 three-quarters of the population will belong to the low-income level.
This leads also to a change in advertising. Models that portray racial standards and consumption habits of the middle class will have to be adapted to attract the new market. In this scenario, the commercial created for Antarctica beer draws attention: it shows a traditional Brazilian informal samba-playing group, with a majority of blacks and mulattos, rather than a token black for political reasons. The commercial was certainly not inspired by the principle of trying to be politically-correct; its inspiration was simply business motivated. In Brazil, 50% of beer drinkers are black or mulatto.
This new development cycle that has in fact already started in 1992, should last until the year 2005. The main reason for placing a limit date to this growth period is the fact that it is not yet possible to identify Brazilian capacity for facing China and India, our biggest competitors in the year 2000. If Brazil is capable of making a qualitative leap in these ten years, we will have climbed a few steps up the per capita income and will be producing different products, no longer competing with the Chinese on the same level. If Brazil misses the boat and keeps wasting year after year in indecision (of the type: inflation is curbed, inflation returns), we will get to the year 2005 competing neck to neck with countries such as China and India.
The de-nationalization of the economy is one of the prices we will pay for the ten years of poor economic management of the country.
No one is arguing that all our problems are over. In fact I argue that our problems will be of a different kind, growth related not inflation related. We will face difficulties in this new decade of the country's development, but problems will be of a different kind. The first one, ironically, will be the management of this growth. We are not prepared for it. Businessmen are slowly realizing the possibilities. Most likely my loyal reader to this point had no idea that things were much better in Brazil than conventional wisdom dictated. Let alone preparing your local subsidiary for accelerated growth.