Friday, 24 March 2017

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 5.1.2)

This portion of the web-log continues to summarise the prime events that impacted the busts and booms of the national economy in the modern era (the 1980s onward); having already described the major impacts of :

- The Latin American (Sovereign) Debt Crisis
- The Plano Real
- The 'Asian Tiger' Crisis

However, after nearly 2 decades of stagnancy and delayed economic fruition, Brazil did indeed experience what might be termed as its '3rd Golden Age of maintained growth with the arrival of the 21st century.

The Global Commodities Boom -
(1999 – 2013)

As is well appreciated, for investors and the mass-populace alike, the 'psycho-geography' of the country is its prolific connection to the provision of basic agriculturally grown and ground-extraction commodities.

Previous description highlighted how 'the earth' originally provided for aboriginal peoples, but thereafter became an engine of wealth creation for the first European settlers and their successive generations, who satisfied not only local demand for foodstuffs and materials, but to great advantage also financially gained enormously from the exportation of an ever greater spectrum of items to Europe, North America, and thereafter the Middle East, Asia and Africa.

This ability brought the regional land-owners immense wealth and effectively continued the 'Patron' and Subordinate relationship well into the 20th century, as such incomes were re-directed into more and more industrialised activities, on the farm, under the ground and across a plethora of secondary and tertiary commercial activities.

At the national level through-out Brazil's modern history, it has largely been the income made available from that combination of mother nature's bounty coupled with man's technical ingenuity that has provided the national income to create the foundations for further increasingly diversified growth that has promoted ever greater social inclusion. Whether that be industrial subsidisation together with legislatively capped wage-rates to allow SOE companies to employ greater numbers of workers and so spreading the national wealth more evenly (such as 1960s FNM trucks), or the well-considered latter-day social-welfare programmes designed to reach those trapped in the vicious cycle that is poverty (seen in the 2010s with education and child-support for single young mothers).

The re-investment from commodities then help to 'de-commodify' what was once a relatively homogeneous workforce, as the generational off-spring of farm and building labourers themselves became better skilled and so perpetuated Brazil's economic expansion.

However, as well recognised by Brazil's 1930s economists, reliance on commodities was and is a precarious affair, given the typically low volumetric value of many grown crops and mined ores
compared to higher value-added products and services, and the volatility of national and international markets. The only exception that of precious and semi-precious gem-stones, but these obviously only minuscule in terms of volume and offering little to the overall national GDP and regional GRP.

Thus for all the arguments for uncoupling Brazil from its economic roots in commodities, the sheer size of the massive contribution agriculture and extraction makes directly to corporate profits when times are good, and indirectly to those most in need, cannot be ignored or indeed undermined in any objective consideration.

For this reason government after government has – whilst promoting diversification of the economic base - sought to also effectively bolster the critically important commodities sector, also well recognising its contribution to the continued diversification goal.

Between the late 1960s and the mid 1990s the global commodities market – and so Brazilian activity – was in an effective slump.

The period started with the North American recession, its ripples throughout Europe, the impact of the mid 1970s Oil Crisis resulting in high energy prices and so cost-disadvantageous growing and extraction and through the 1980s and early 1990s the Anglo 'trans-Atlantic' investment focus decidedly inward and dedicated to 'de-industrialisation' (including asset-stripping), new “transfomative” IT, the growth of knowledge services and of course the banking and investment profits enabled by the expansion of the housing sector (in new build and redevelopments) assisted by sizeable base-rates and so interest-rates.

Effectively over that long 25 year period the only interest from specialist investors within the general commodities arena was regards oil-price spike speculation in 1974/5 and gold as many specialist and lay investors sought safe-haven allocations through the much-distressed era.

With most of the world in what appeared a slow economic melt-down (excluding the continued rise of Japan), consisting of high inflation, public disquiet, trade-unions' voices, workers strikes, increasing unemployment and so decreased tax-takes to central government and municipal budgets creating further unemployment and so economic malaise, there was seemingly all the reason in the world that the commodities sector would inevitably become as much a 'ghost territory' as the mining 'ghost-towns' of old.

But from the mid 1990s, and most visibly from 1999 onward, a massive change of sentiment would occur as the global economy became stronger thanks to the outcomes of results of previous historical 'Global-Macro' events.

The 1989 collapse of the USSR initiated the 'opening' of Eastern Europe and Russia to Capitalism and economic revival, the 1992 shift in India from an effectively closed 'Raj' operated industrial economy to a more open and competitive one, and the impact of China's increasing internal reforms and more 'open door' policy (aided by the return of the trading hub that is Hong Kong), and the integration of Europe under the 'EU', together all meant that the economic 'techtonic plates' of world had economically shifted massively within a decade.

This socio-political shift would be the precurser to a new globalist growth mentality that spanned from from Wall Street to Warsaw to Wuhan. The adoption of seemingly raw capitalism however was tempered with very necessary inclusion and growth social agendas. That in turn meant truly metamorphic physical alterations to cities, towns and whole regions by way of major infrastructure projects which in turn provided the impetus for incoming private capital to literally and metaphysically rise from the foundational infrastructure provided.
Brazil would experience what became arguably its most meaningful leap into a better future, surpassing its previous golden age represented by Brasilia. Whereas then the same upper-middle class merely relocated to a totemic city, from the 1990s onward a whole new lower-middle class would be created thanks in no small part to the direct and indirect income provided by globally exported basic commodities.

By the early 1990s the economic template of Brazil regards industry and services had broadened considerably, but services and the automotive element of production industry were still somewhat infant, especially regards export earnings.

Although Brazil had long since modernised, at this time there was far greater internal and external income bias towards extractive and agricultural commodities. But an renewed export stance was especially vital given the unserviceable foreign debt load of $122bn, declining internal growth, high inflation and poor policy formation.

The following comparison provides a much simplified picture regards the export split by monetary value, with a 1993 estimated vs 2015 actual.

Sources: OEC and Harvard's Economic Complexity 'Tree Maps'

Comparative Export Earnings....set-out as:
1993 (est) vs 2015

Total Value:
1993 approx $34bn 
2015 approx $195bn


Extractive :
Iron Ore and Concentrates     15% vs 8% ($15.2bn)
(as Granular/Powder)               2% vs 3.2%
Crude Oils                               4% vs 6% ($11.8bn)
Refined Oils                          1.5% vs 4% ($8.04bn)
Gold 2% vs 1.7%

Agricultural :
Arable -
Soyabean                               15% vs 11% ($21.1bn)
Soyabean Oil/Cake                  6% vs 3.9%
Coffee                                     7% vs 2.5%
Maize                                      5% vs 2.3%
Sugar Cane                             6% vs 4% ($7.83bn)
Fruit Juices                              3% vs 1%
Tobacco                                 3% vs 1.5%

Livestock -
Poultry                                  1.5% vs 3.3% ($6.53bn)
Pig Meats                              0.5% vs 1.8%
Skins                                        2% vs 1.4%

Automotive :
Assembled Vehicles               0.5% vs 2.56% ($5.0bn)
Components                          0.9% vs 2.76% (5.4bn)

(All Other Items) (not shown to aid clarity)

This illustrates the re-shaping of the general export-base of goods over two decades. But what is most obvious is the manner in which commodities maintained and indeed grew their importance to Brazil for foreign currency earnings as the notional pie grew 670% between 1993 and 2014, contracting by 14.5% in the following year shown.

An export earnings time-line depicts the impressive impact of the 'commodities super-cycle' on national income.

1993 - $39bn
1995 - $50bn (an initial 25% jump to feed China, Asia and E.Europe)
1996 - $52bn (new flat-line trend over next 3 years - effects of Asian Tiger Crisis)
1997 - $55bn
1998 - $55bn
1999 - $49bn (the beginning of the globalisation 'super-cycle' for the next 13 years)
2000 - $60bn
2001 - $62bn
2002 - $63bn
2003 - $79bn
2004 - $105bn
2005 - $122bn
2006 - $141bn
2007 - $166bn
2008 – 208bn
2009 - $160bn
2010 - $202bn
2011 - $261bn (the 'super-cycle' peak, three years after Western Financial Crisis)
2012 - $250bn (the beginning of the EM slow-down)
2013 - $245bn
2014 - $228bn
2015 - $195bn

As regards export destinations, as is well known, a fundamental re-proportioning shift took place with the rise of China (and SE Asia).

1993 – the EC 27.6%, LatAm 21.8%, USA 17.4%, Japan 6.3%, RoW 26.9%
2015 – China 18.4%, USA 12.56%, the EU (F,D) 14.3%, Argentina 6.6%, RoW 48.14%

With lesser relative imports, in 1993 Brazil had a Balance of Trade surplus of $13.1bn, whilst in 2015 the figure rose to $25.3bn. Given that in 1993 the surplus was one-third of export value, and that in 2015 the surplus amounted to 'only' 13% of export value, it is easy to understand the great degree to which Brazil both opened its borders to higher-value imported goods and services whilst arguably suffering from the exportation of low-value commodities.

Whilst its export income rose five-fold in this period, its surplus only doubled.

This then follows the necessary adherence to follow globalisation policy by better balancing the BoT so as to generate increased international mutuality. Yet Brazil well recognises the possible derogatory long-term impact of lower-grade exports vs higher-grade imports as the standard of living and expectations of the populace grows and commerce demands high-quality foreign capital goods to boost the quality of Brazilian made goods and services.

Thus possibly leading to an increasingly negative BoT if the export dimension is not well managed.

The need to adequately protect the nation's financial standing as commodity exports decline seen in the next item, government recognising a need to deflect the level of foreign imports in B2C and B2B goods and the need to internally re-invest to raise Brazil's industrial and service capabilities.

Whilst the last item of this web-log looks at how corruption around “national commodities for the public good” has recently come to light.

The 'Plano Brasil Maior' -
(2013 onward)

Brazilian economic growth between the early 1990s through to 2013, provided twenty years of improvement for many.

Wherein the old, typically functionary based middle-class (professionals, senior civil servants, etc) became the new Upper-Middle whilst others (teachers, administrators etc) expanded to comprise the new Core-Middle. And critically this new growth era allowed many to rise from the Working Poor to fill a newly emerged category: the New Lower-Middle.

Whilst obviously favourable boom economic conditions for many, the raised standard of living came at the cost of relatively high inflation rates, seen with the strengthening of the Brazilian Real.

The heavily populated urban coastal regions, the cities and tentacle suburbs, saw a vicious circle of spiral of cost and so price inflation, as the sensitivity between input costs and output costs and so ultimate price rose. This ranging across base materials to semi-finished items to physical labour to a new sets of 'professional' disciplines (formulated to propel the 'lower-middle' zeitgeist and compel consumption) to critically IT and associated services.

The ripples of the global economic recession finally hit Brazil in 2013 and even though high value exports such as vehicles are still strong, the country has found itself caught between the after-effects of its expansionary modus operandi and the new need to re-align its national cost-base (and indeed the strength of its currency).

Recognising the predicament, the Roussef government created the 'Plano Brasil Maior', which itself echoes the 'Import Substitution Industrialisation' policy of Vargas and Kubistcheck.

Of primary concern is the emerged pattern of B2C and B2B purchasing behaviour, buying ever more from foreign countries, inevitably much from the USA and so arguably an over-reliance on external entities who have vital core competencies / human resources, elements of which are beyond the domestic industry and services skills-base.

Furthermore, during the expansion of the national Service sector what is now viewed as problematic 'De-Industrialisation' also took place (this historically typical). With this a loss of suitable professionals in various fields and invariably little education and training to fill what were thought to be yesteryear activities and roles. So, just as advanced economies are struggling to re-kindle the 'economic mass' of their old industrial activities, so Brazil has also recognised this problem.

Added to the problems of the advanced skills vacuum, and those lost core skills, is the fact that those twenty years of economic expansion were also assisted by government spending on high cost infrastructure and social programmes, all paid by increasing tax revenues and increasing 'take' and higher foreign capital markets debt.

[NB The inability of the City of Rio to make a recent payment and subsequently 'bailed-out' by national coffers depicts much about the current unsustainable situation for the hosts of the Olympics and Paralympic Games].

“Innovate to Compete” is the slogan which endeavours to nurture a Silicon Valley mindset, but also beneath which a swathe of protectionist measures (in the ISI manner) are designed to provide the necessary defence against global forces (especially so with Autos and IT). So as to allow Brazil to reconfigure itself from a late 20th century 'commercially yesteryear' economic engine into a 21st century 'commercially advanced' economic powerhouse.

Thus more government and private investment is being funnelled into engineering and technological careers, an absence of these skills recognised as severe barriers to continued development.

When presented by Rouseff et al, the 'Plano Brasil Maior' had six prime 'pillars':

1. Re-Integra : tax exemption for exports, the scheme will refund between 0.5% and 4% of the costs of taxes incurred in the creation of industrialised goods.

2. Government Purchases : establishing a “margin of preference” of 25% for domestic good and services in state tendered contracts, relative to specific strictures for national and regional (re)planning regards investment in jobs, industries, locales etc around innovation.

3. Commercial Defence : the scope and depth of investigations into 'anti-dumping' practices by foreign interests strengthened fourfold in associative Ministry headcount, with specific focus on imported goods' true origins and under-pricing.

4. Certification and Research: strengthened product and process standards set by a new Quality Institute. Its prime attention regards any disparity between the quality of foreign made goods and nationally produced goods, and the creation of a network of laboratory centres across the country that formulate and 'incubate' advanced scientific and technological activities to support the initial phases of commercial transfer and exploitation.

5. Payroll Tax Exemption : to create job creation stability no new employee tax burden to those firms operating in sectors exposed to dominant foreign competition (eg clothing, shoes, furniture and software), with taxes paid refunded by a central governmental body.

6. PIS-Cofins, Tax Exemptions and Digital Book-Keeping : vitally to the auto-sector, a reduction in the 'IPI' tax on trucks and light commercial vehicles (aswell as building materials and capital goods) to promote building activities. Also, payments and compensation claims to be paid by government within 60 days to those firms with digital book-keeping.

As always such reforms generate reaction, and so various criticisms have been voiced within Brazil.

Firstly, that the pledges made by national government to take on the fiscal responsibilities of per state bodies that directly interface with commerce and workers will not be upheld, leaving firms and people to ultimately fend for themselves; this seen from a long history of such empty promises (eg the withdrawn 1950s assistance pledge Isotta-Romi).

Secondly, that this manifesto plan is limited to micro-economic issues, and absolves itself of as important macro-economic factors (ie interest rates, exchange rates and salaries).

Thirdly, that of the level of public indebtedness, whereby (as seen with the city of Rio de Janeiro) the National Treasury has taken on the weight of notionally Independent State incurred debt.

Fourthly, the likelihood that such (obvious 'back-door') protectionism seen with “Certification-ism” will compel and invoke similar actions from foreign importing nations of Brazilian exported goods and services.

Operation “Car Wash”...
and the Required Reforms -

There is an old saying that “a Policeman's lot is not a happy one”, precisely because maintaining the civil body of what passes as 'civilised society' is a very hard task. The recent events next to the heart of government in London well illustrate that whilst politicians provide the rhetoric, it is the police-officers on the ground who really 'represent' the people.

[NB it should be noted that whilst politicians are elected, seen and have a modicum of influence, it is the purity and strength of internal institutions (from social services to policing to the law) that are the effective agents of the people and for these to be strong they must be both efficient yet also well supported by a strong national purse].

This notion perhaps best seen in recent years in Brazil, wherein once near broken federal and state
police bodies have themselves gained from Brazil's commodities' driven global rise, so as to crystallise the nation's motto of “Order and Progress”. This so at both the bottom of society and at the top.

At the bottom the world witnessed how, in the run-up to both the World Cup and Olympic Games, para-military style policing was the only way by which the favellas of Rio de Janeiro, Sao Paulo and elsewhere could be cleared of the once entrenched violent drug gangs. This then providing the required home environment in which a new generation could improve itself to inturn improve Brazil.

But more recent years have seen how Brazilian law enforcement has also targeted those at the very top of society in business and politics who – although already extremely comfortably-off – sought to utilise their power for their own material gain.

Most notably by effectively creating collaborative inner-circle cliques by which to 'skim from the top' from the massive revenues and capital expenditures of the national oil giant Petrobras (and other large firms) through the intentionally inflated costs of procured infrastructure contracts.

This cam to light in 2013/14 just as the Brazilian economy started to contract because of global trade conditions caused by both the 2008 western financial crisis and the fact that the EM regions had both not ultimately 'de-coupled' from the west, and because China sought to cool-down its own over-heated economy.

These conditions led to collapse of the global oil price and a new unseen fragility to an over-indebted Petrobras. This would have immense repercussions for the national purse given the enormous contribution to government income the essentially part-privatised state-controlled oil company provided.

However, 'to add insult to injury' for the people of Brazil, thanks to an altered hard stance by judges and better empowered police, it became clear by late 2015 that Petrobras had been used as a 'gravy train' for about two-hundred senior figures

The scandal became popularly known as 'Operacao Lava Jato' (Operation Car Wash), the initial police code-word for the investigations.

[NB the promotion (by the press) and popular adoption of this very phrase itself indicates that today's masses may have greater faith in the idea of a responsible and benevolent authoritarianism, by individuals whose existence is based upon morality and decency, as opposed to the club-like 'high-tower grandiosity' of senior politicians and corporate executives].

The scandal began with an investigation into money-transfer/laundering in early 2014 between a black-market currency dealer and, his 'client' and the present of a new Land Rover Evoque. It was not the car that provided the name of the affair, but the fact that it apparently started at a Petrol-Station/Car-Wash.

[NB the deniers of the allegations will undoubtedly highlight that this location origin appears very convenient – almost unbelievably so -and was used to initially target Petrobras and gain widespread public belief in the story and so topple a powerful cohort of business people and poliicians].

It seems this activity had connections to a police report by Hermes Magnus back in 2008 regards similar attempts to launder money through his electronics parts manufacturing business.

The weight of this case led to wider exploration based upon conspiracy allegations and so possibilities between various Petrobras directors and construction firms regards the allocation of lucrative (overly high-priced) tendered contracts.

Press reports state that by by late 2016 more than R$30bn / US$8.9bn had been potentially illegitimately moves and involved a group of nine construction companies and disparate group of people numbering about 200.

The effect upon Petrobras was nigh-on implosive, delaying its FY2014 results and seeing a write-down of $17bn in 2015, nearly prey to its bond-holders who were on the fringe of seeking full liquidation had the results not been published in time, was forced to suspend its dividend payments, cut capital expenditures by 40% over the 2014-18 timelin, and required to sell $13.7bn worth of assets to reduce its high balance sheet debt.

The political impact was equally large, with enquiries into the seemingly boosted fortunes of the Worker's Party Treasurer, a Former Chief of Staff, the Speaker of the Chamber of Deputies, the Former Minister for Energy and Mines and a Former President indicted.

The gravitas of the matter, indicating its scale, became sharply apparent when the small plane carrying the Supeme Court Justice who was administering the corruption trials crashed into the sea near the tourist town of Paraty in the state of Rio de Janereiro; many believing this hardly a coincidence.

Investigations are ongoing, but the scale of the matter became apparent when the CEO of the Odebrecht conglomerate was given over 19 years because he provided over $30m in bribe payments to Petrobras personnel.

But whilst justice is seen to be done, this will not be of help to those directly affected by the virtual collapse of the oil giant. As a major employer its delicate condition means operational cut-backs so affecting the income of many; which obviously effects regional local economies, from general retailers to municipality incomes.

Petrobras was a major show-case and development vehicle for the over-due Brazilian privatisation drive, but without major change, the few but powerful internal investment institutions, the general public and external investors may be cautious about putting their personal or client monies into a what might be seen as still a questionable entity. Perhaps the only future course being a massive clear-out of top-tier seniors and their immediate lieutenants.

Critically, given the real-world impact of the scandal upon the public and investment community alike, it seems only sensible that to ensure such an episode cannot occur again within Petrobras or a similar corporation, that very necessary commercial reforms are undertaken so as to put a larger slice of the many government-controlled firms into the hands of more prosaic owners, executives and managers.

This means greater exposure to the national and international public bourses; wherein a new round of successive stake-holders – critically with financial and strategic acumen – would be better able to ostensibly 'police' the firm through much improved transparency and executive questioning.

The impact of the Petrobras scandal demonstrates that any possibility regards the overly cosy relationship between Brazilian politicians, those state appointed national champion executives and the seniors of contract-supply firms, must surely be over.

The true scandal would be if the current status quo continued unabated, since it would deter optimism and new allocations of domestic and foreign capital; new capital that would serve the many, not the few.

To Follow -

A summary of the current economic climate, underpinned by the OECD's observations and findings regards Brazil's near and medium term socio-economic picture.

Friday, 10 March 2017

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 5.1.1)

As seen from the end of the previous weblog, given the very targeted optimism surrounding the US at present, within what is an improving but bruised global economy, it looks likely that even though more protectionist itself regards internal policy, Brazil will be willing to increase its mutual trade levels with North America.

Doing so would better balance and better broaden its exports (and reciprocal FDI) template, given the slowdown in Chinese base metals production correlated to decreased infrastructure spend and processing/secondary industries spend. Furthermore it is now shown that even with the multitude of people, its own rise up the value-ladder and accompanying rise of general living standards and expectations has meant the greater scarcity of both the very low cost unskilled manual worker (hence its own off-shoring) and indeed increased scarcity of the suitably mid and high skill levels; resulting from the impact of a decades' worth of a strong wage-inflation spirals, now resulting in a markedly higher cost of labour across the full labour spectrum, so much so approaching 70% of Southern Europe wage rates; whilst its poor 'demographic pyramid' also creates headwinds for future wage deflation.

Thus recent reports demonstrate that on an (unavoidably simplified) like for like basis, Brazil now sits below its counterparts within the BRIC bloc in terms of the cost of its broad (industrial and commercial) skills base, and thus comparatively boosts levels of per person productivity.

This state of affairs indicates that the potential for a strong trade relationship between an increasingly buoyant North America and a competitively export-priced Brazil.

Importantly one in which, unlike that of China's previous ravenous appetite for enormous exports of low-value commodities. Should now be based upon a far better balance of respective low, mid and even high value-added goods and services; from commodities to vehicle components to IT services; this in turn boosted by a strengthened Dollar and mid-term weakened REAL (itself much strengthened over the last year, since its 'bottom' as of Feb 2016, but even so still appreciably below its pre-2015 FX rate). With interestingly - unlike China, Japan and Germany - Brazil not accused of a deliberately induced 'currency manipulation' by Washington.

Both informed global investors and America's general populace have obviously become more optimistic about the 'Trump Pledge': specifically promises regards a) corporate tax cuts for nationalistic producers, b) additional fiscal stimulus b) higher government spending on 'economic multipliers' (eg Defense) and c) planned and 'shovel ready' infrastructure projects.

Thus whilst Brasilia's political administrators are still reshuffling and under the auspices of the new President Michel Temer (his appointed cabinet lambasted as heavily white and male) it seems that the old guard politico-industrial complex should be able to 'reset' Brazil back onto its previous growth path.

Of course the fate of 'Brazilian Autos' – from parts to finished vehicles to increasingly Engineering and Research - resides very much in the government's ability to balance or re-prioritise export demand vs domestic demand, producing nations typically having to 'drive' one or the other, which although not always economically incompatible do have historically defining policy characteristics: related to the either a constraint of wage rates to create a durable competitive 'export edge', or the opposite of intentional wage-inflation to boost domestic demand, as seen in China to date.

Brazil has historically been here time and time again, and as previously stated, the following will provide a snap-shot of the watershed periods with Brazil's modern economic past.

From a period of stagnation and indeed stagflation, Brazil undertook much internal economic 'house-keeping' having recognised the destructive perils of unrestrained foreign debt previously used to fund internal growth, and thereafter responsible re-connection to globalisation and its own enterprise spirit; so much so that it was able to steer itself through sizeable international and national economic challenges and later take advantage of global economic tailwinds.

The Latin American [Sovereign] Debt Crisis -

As depicted throughout this weblog via illustration of the Brazilian automotive ambition and expansion, the nation long sought to become a true equal to the world's leading industrialised countries. Since even the 1920s some believed that its 'development destiny' had become essentially denied because of the strong focus Anglo-Saxon held 'global finance' had toward the ever-expanding USA, the desire to reconfigure the industrial and commercial power-base of Europe through its national bourses, and likewise re-configure the economics of the newly independent and expectantly independent countries (from Northern and Eastern Africa to India and far beyond).

Such immediate and varied focus by the powers of finance – that would continue well into the future - meant that the immense potential and promise of 20th century had been lost; to the anguish of many Brazilians, from politicians to the people. As recognised, it would thus remain as a low-value provider of a mass of exportable commodities, and thus set on a slow development path.

As also seen, Brazil's answer were the catch-up efforts of Vargas and Kubitschek, the instillation of basic industries and the notion of '”50 years development in 5 years”.

Even though relatively untouched by the decimation of WW2, the European reconstruction plans would provide the impetus of rapid change without the political and populace problems experienced in Germany, France, Netherlands etc. Thus, Brazil's new construction and development plans, much across 'greenfield' sites, did indeed prove rapid and powerful through the mid 1940s to the mid 1960s.

Visible change appeared almost exponential by way of impressive infrastructure and prolific industrial growth, creating a near virtuous circle of improvements regards standards of living for a new educated middle class, and indeed set high expectations for the masses existing either still on the land or in pop-up shanty towns and suburbs that served the prime economic locations.

However, whilst growth was indeed prolific it was also somewhat misunderstood, given that much could be seen to be achieved from such a small and low base-line to raise the lifestyles of a small proportion.

But severe problems would be encountered when, in good faith but with limited appreciation, those in Brasilia believed that Brazil's 'economic miracle' could be maintained well into the future, for the gain of the masses, by 'betting the farm' on the wealth generation of the day.

It was also previously seen that Brazil continued to enjoy good fortune through the late 1960s and early-mid 1970s whilst the USA and Britain had suffered downturn and recession. In this manner it was the largest of the many Latin American countries to progress unabated, the feeling in central and South America being that the external recession was (on a global level) very localised and the result of over-speculation and over-investment after two and a half decades of economic expansion.

On the face of things Brazil's masses were still living in the comparative 'dark-ages' compared to North Americans and indeed the more fortunate Europeans. So it was understood and believed that with much yet to be achieved to provide for the many, that there was still much room for further enormous value extraction from its resources, people and processes, with such a virtuous circularity the basis of justified federal, state and private capital sourced investment. This the strong basis for a continuation of national expansionary policy.

However given the very scale of the development challenge and the inability to self-fund civil projects from government coffers alone (given the already heavy burden of infrastructure spend), economists recognised that relatively inexpensive foreign funding could be obtained given the country's vibrant health and its accordant 'low-risk' sovereign-bond ratings and likewise a similar strength within semi-private and wholly private industry allowing relatively low coupon 'paper' and low interest 'notes' to be issued.

These were indeed issued to enthused well established and newly emergent foreign investors, who themselves wanted better ROI than was immediately available from either the US or Europe (booming Japan of the time still effectively closed to foreign parties as the family-led Keiretsu conglomerates maintained strong intra and inter allegiances so as to rebuild and propel Japan).
As a proven economic leader some might argue that Brazil not only created the standard sovereign template for attracting foreign capital, but also heavily promoted the concept amongst many other 'forward-looking' yet lagging Latin American countries. Most notable were Argentina and Mexico. The former with similarly strong European ties for technology transfer and a well educated population, whilst the latter had a low cost base and an inevitable future serving the USA far beyond tourism. Vitally, it seems likely that both Argentina and Mexico sought to recapture their distant glory days – and felt similarly “denied by history” - and thus sought to make the developmental leap forward to gain their “rightful places” much higher up the world economic order.

Buoyed by the good times that rampant Capitalism brought, with little apparent reason to be overly cautious, and with a need to both serve the public good and repel the ever-present threat of revolutionary Socialism and Communism, Latin America chose to take advantage of the world's money markets and to access at cheap rates what seemed a glut of foreign finance, much of that generated by the new crop of oil rich Middle Eastern states themselves far further behind on the economic development path.

[NB Given the vast internal distances involved and reliance on numerous fleets of diesel-powered goods vehicles and locomotives, Brazil's own growth relied upon access to suitable and affordable transport fuel (beyond self-made car related Ethanol). Supply for this high demand readily available from the Middle East: hence the economic mutuality appeared wholly rational].

To maintain the 'miracle' growth model meant the funding of federal,state and municipal infrastructure investments and transformative social programmes (from education to health etc), and to do so Latin America's average national borrowings from foreign sources rose at an annual rate of 20% over the seven years from 1975 to 1982. Numerically this meant external debt grew from US$ 75bn to over US$ 315bn; about half of Latin America's total Gross Domestic Product, with the servicing of the debt ratcheting-up at an even faster rate.

This was largely because much of liquidity obtained had been negotiated in the benchmark 'stable' US$ (with additional fringe Middle Eastern lending likewise in Dollar-pegged currencies). Unfortunately, unforeseen was the after-effect of the OPEC created Energy Crisis and its after-effects, vitally the premis that after five years of economic stagnancy by 1979 the USA started to raise the domestic interest base-rate. Doing so to both battle internal price-inflation (and so real-world devaluation of the world's cornerstone currency), strengthen the banking sector's profitability so as to grow domestic lending to businesses, housebuyers and consumers, and (ironically) also seek to attract foreign liquidity onto its own shores as part of its own globalisation and inward-investment agenda.

[NB this primarily that of cash-rich Japanese firms – from Toyota to Hitachi to Mitsubishi - who had gained from their own exports to the USA, and sought 'transplant' factories, so strengthening vitally important US-Japanese relations].

That revaluation of the US$ created unexpected FX “distortion” which in turn added much greater “load” to typically both the principle and interest payments borrowed by LatAm nations.

Added to which, much of the renewed global investment focus during this period by many institutions (from pension funds to newly emergent 'hedge funds') was directly upon the USA's high-finance and main street banking sector, serving mid and high-value industry (such as computing), a revitalised corporate America (through fully deployed IT and containerised logistics) and new avenues of consumer-credit. (This process expected to thereafter be replayed in the UK).

This done so from 1979 onward as US government policies to end stagnancy began to take hold, but still during the pains of the 1980/81 recession.

The devastating result was that the 'delayed' US recession itself had a global knock-on affect, especially for commodity exporters to the USA. Trade Unions and State-Aid had managed to previously keep large portions of flailing domestic heavy industry (steel, chemicals etc) going – if not profitably afloat against far more efficient and cheaper European and Asian competition.

But by the late 1970s with new vehicle sales down, housing starts low and City and State budgets deep in the red (eg New York etc) so unable to undertake infrastructure spend, demand for steel, aggregates etc collapsed and with it demand for various Brazilian commodities.

Thus Brazil and its neighbouring countries were caught between both 'the Devil' in terms of Foreign Loan Debt Servicing and 'the Deep Blue Sea' in terms of sizeable reduction of exports and so vital US$ denominated income.

Banking analysts recognised the enormity of this problem, made all the more fractious given the short-term time-frames loans had been agreed upon, which inevitably led to the first of many negotiated delays, defaults and 'deferments'; Mexico the first to officially highlight its precarious position, which halted most if not all capital markets lending for a time. Thereafter the need to overcome this new reality meant that new agreements would be drawn-up.

The need to fulfil these agreements, as supervised and financed by the IMF, would lead Brazil and its neighbours into what became known as 'The Lost Decade” between 1982 and 1993.

Hence, far from ensuring the ongoing public joy of the previous 'economic miracle' the optimism of Brasilia's economists, public servants and politicians – who themselves were undoubted beneficiaries of globalisation's 'top-tier' advantages – meant that they either unwittingly over-looked the idea of a 'Global-Macro Worst-Case', or simply preferred to ignore any possible potential for economic collapse in their own 'Impact vs Probability' scenario plotting.

Untold Millions were trapped in poverty as a direct and indirect result – loss of employment to contraction of welfare programmes as austerity measures took hold - affecting the prime of one generation and impinging on the life-chances of those following.

This episode was a stark experience for many older Brazilians to this day, who unfairly place populist blame on the IMF for the outcome (the IMF actually the arbiters and financial saviours) when that blame rests squarely on the shoulders of their own supposed political intelligentsia.

The 'Plano Real' -

From the late 1960s through to the late 1970s the Militarily-led government had relied upon a mixture of foreign financing, depletion of the national pension plan, much state-owned industry, substantial government expenditure and heavily capped labour rates to fuel domestic and foreign investment led national growth.

However, whilst this led to surplus profits “profiteering” so as to encourage further investment, the situation ultimately led to ever increasingly high inflation by the mid 1980s, the heavily protected state industries and huge diverse conglomerates essentially oligopolies with little or indeed no competition to drive down prices and so inflation.

This resulted in a near decade of rising prices without fundamental economic growth, and thus the 1980s were seen as a 'lost decade' and compared to the impact of the 1929 Great Depression. Seemingly unable to effect change by the mid 1980s demands for authoritarian regime change were being heard, for the return of democracy and hope that new minds could solve the national dilemma.

This would be eventually achieved, by way of the 'Plano Real', but only as the result of much economic experimentation, desperate failures and a worsening of conditions as from the one failed plan was superseded by another. Ultimately it would take eight long years between 1986 and 1994 – almost a new plan every 6-12 months - for the beginnings of a new positive economic era to become apparent.

The annually re-formed economic plans were:
1986....Plano Cruzado I and Plano Cruzado II
1987....Plano Bresser
1988....Politica Feijao com Arroz
1989....Plano Verao
1990....Plano Collor I (“Plano Brasil Novo”) and Plano Collor II

1994....Plano Real.

These former efforts had instigated the privatization of SOEs and the reduction of import tariffs – both important steps forward that in years to come would provide great international goodwill and encourage trade.

But because of policy limitations (from short-sightedness) they also tried and failed to stop the enormous inflation and hyper-inflation over the fourteen year period between 1980 and 1994. The triple digit annual rate rises leading up >2000% in 1989. Doing so by introducing what were ultimately short-lived “lip-service” currency name changes with inadequate fiscal and monetary reforms to underpin the reforms seen in enterprise and commerce.

After much painful experimentation - itself having to react to a fast changing 'Main Street' commercial dynamic that ultimately yet again rested upon the stability of the US$ - it was recognised that any successful remedy would need to understand the effects of the 'Inertia Inflation Phenomenon'. This was the term given to the fact that in everyday commerce official and unofficial indices was trying to pre-gauge stagflationary price rise effects and so in itself became a leading prompt of the inflationary spiral; especially so as the US$ became a favoured exchange basis where at all possible, especially regards large and very large purchases between businesses.

Up until 'Plano Real' previous currency reformats / name changes had effectively ignored the reality of the market-place and sought to impotently intercede with little more than a new veneer and eternal hope of disinflation.

'Plano Real' introduced efforts that honed-in upon the root of the currency disparity problem, doing so by identifying and promoting pricing parameters with far greater recognition of reference to a pre-set 'nominal valuation' against the US$ and a certain base-point. This both partially recognised the effect of high inflation and provided a method by which to tame the devaluation problem.

This included the creation of a non-monetary currency (used only in official calculation not in circulation) called the 'URV' (Unidade Real de Valor) [Real Unit of Value] the strength of which was rated (with slim flexibility) either side of US $1.00. The dual currency listing was used at first in closed markets and later increasingly amongst the power players of open markets on 'Main Street', in which both the 'Cruzeiro Real' (the then in-situ Brazilian currency) and the URV was shown by vendors to buyers; but any exchange had to take place using only the readily available 'Cruzeiro Real'.

At first viewed as another attempt at 'smoke and mirrors' its ongoing existence eventually started to have the required positive affect. This was given further credence with the dispensation of the 'Cruzeiro Real' and use of the simplified 'Real' (adding longer term perceptual validity).

This was supported by major shrinkage of fiscal and monetary policies with primarily government spending and expenses much reduced and the raising of interest rates to stem the previous entrenched state and industry behaviour of massive borrowing from large liquidity pools at low rates, which had exacerbated both profits and inflation. The base-rate change both quelled the previous domestic frenzy whilst simultaneously attracting foreign capital on the higher government paper yields, so reducing the national Current Account deficit, raising Brazil's foreign currency reserves, with the effect that the raised base-rate could also underpin what was at first seen as an ambitiously high official valuation against the US$.

Between 1995 and 1999 the New Real, backed by economic policies, did indeed maintain welcome new strength, with foreign industry (including global auto-makers and parts suppliers) viewing the country as stable enough to once again invest within to a level not seen since the early to mid 1960s.

The good times appeared to be back, but a new currency crisis in the opposite direction of 'Maxi-Devaluation' would create new worries for Brasilia in early 1999 when the Real ended its quasi-fixed FX rate against the US$ and was allowed to notionally 'free-float' on world capital markets.

Unfortunately the Real was caught in the aftermath of the Asian Tiger Crisis – upsetting the world view on many (if not all) previously fast-growing EM nations, from Asia through Latin America and into Africa. But the initial high volatility experienced meant that Brasilia soon stepped-in to support the international value of the Real

The results were that from 1994 to 1999 the Brazilian based and new entrant foreign auto-makers were both able to initially take advantage of the weak but strengthening Real by expanding in-situ production sites and capacity, whilst latterly utilising the later strong 'dirty-floated' Real to reduce the cost of 'high-value' imported specialist components from overseas, especially specific electronics items manufactured in S.Korea and elsewhere across SE Asia (ie engine management hardware and in-cabin instrumentation and entertainment hardware) as various SE Asian currencies dramatically suffered 'overnight' devaluation.

The 'Asian Tiger' Financial Crisis -

The slow-trickle spread of Capitalism throughout S.E Asia from the mid 1960s onward – massively assisted through the creation of a separate S.Korea – followed in the trail of the seen to be booming Japan.

Throughout the 1980s the region grew, albeit slowly, relying upon newly invigorated trade. It became ever more integrated as aspirant nations such as Malaysia sought their own 'economic miracles' through the licensing and importation of foreign technology transfers (eg Proton Cars and later Perodua Autos, leading to Proton City), whilst those less developed countries such as Thailand and Indonesia initially became the new low-cost centres for materials processing and associated low-value production and assembly.

Much of this prompted by Japan, which by even the early 1980s needed to off-shore its own low-value activities in consumer electronics and vehicles to off-set the much increased cost-base at home and to thus retain its 'salaryman' (job for life) corporate culture, which underpinned social cohesion.

In this period China was yet to become the regional economic giant, yet it too had historical trade links with many countries importing food, textiles etc whilst exporting military hardware, thus was also a less prolific but important influence; especially so with use of the US$ (in what was supposed to be a closed-economy) for cross-border transactions.

The 'colonial' influence of the Dutch in Indonesia, the British in Malaysia and Americans in S.Korea, together with the independent trade hubs of (previous) Hong Kong and Singapore meant that by the 1980s leading financiers and industrialists across the region had been born into the schism of highly mixed-market economies, politicians typically facing West and East as desired to ensure commercial vibrancy through the decades.

And it was that very vibrancy which underpinned the elite's focus on personal and family wealth - as opposed to national financial standing – that created what became the most prolific case of overlooked pan-regional 'balance sheet bankruptcy' and ensuing regional 'financial contagion' ever seen.

By the early 1990s the region's historic trading network had been boosted yet further by the 1967 creation of the ASEAN trading bloc, the major influence of Japan therein, and renewed interest by the West (from semi-conductors to shipping).

[NB the original ASEAN founders being: Malaysia, Singapore, Indonesia, Philippines and Thailand, with the later participant members of: Brunei (1984), Vietnam (1995), Laos and Burma-Myanmar (1997), Cambodia (1999), with East Timur and Fiji awaiting membership acceptance].

By the early 1990s the most developed and powerful nations were S.Korea (powered by its cheabol industrial and commercial structures...akin to Japan's Keiretsu) followed by a well proven Malaysia and thereafter the subtle achieved yet heavily reformist Indonesia and Philipinnes; with Thailand well engrained in regional trade yet still to undertake formal structural change.

This fundamental shift in economic stance plus the offering of high interest rates provided the basis for much inbound foreign originated finance, especially from the West. The rationality was that the foundations of strong B2B and B2C markets were being created, and any parked monies for future local investment would be well rewarded with strong monthly and annual interest gains and the high probability of a strengthening currency over the mid/long term so boosting repatriation values.

Thus through the late 1970s, 1980s and into the 1990s Asia absorbed about half of EM inbound money from AM countries, SE Asia most favoured, with annual national GDP rates growing at 7 – 14%. At last SE Asia appeared to have its own 'Economic Miracle' 25 years after Latin America's own speedy development experience.

As such (after the Japanese Yen) the economic strength and increasingly liquid Won of S.Korean meant that it became the region's most powerful currency, followed by the 'up and coming' Malaysian Ringitt , Indonesian Rupiah and the Philippino Peso.

However, it was a somewhat haphazard process through relatively small control-loops of power, whereby incoming monies were ostensibly put into specific asset-classes that themselves were being orchestrated by those in seats of power at federal and state levels. Such people would themselves have been direct or proxy-represented early investors in schemes, the value of their own holdings inevitably boosted merely by the existence of incoming foreign funds, even before being thereafter increased when projects became promoted and 'made live' with official go-ahead' or indeed later rounds of investment sourcing came from supportive local underlings.

But a primary emergent problem in the region was the critical value-divergence between the retained (ie overt high valuations) of pegged currencies and the effective devaluation of national current accounts in ever greater deficit status; Thailand, Indionesia and S.Korea the most exposed.

Given Thailand's lesser development stage, less used in foreign trade transactions was the Baht. However the country's increased proclivity/reliance upon inward bound high-value tourism from the West, Australia and Japan generated a 'schizophrenic' economic oddity. (Thus it may be believed that this state of affairs was deliberately used to maintain an unjustified internal valuation since the early 1980s, to absorb ever more liquid foreign currencies).

It was all too sadly ironic then – but perhaps predictable by cynically aware economists - that it was the very issue of “empty” national foreign currency reserves, and so a questioning of the Baht's true comparable value, that set off the pan-regional currency fiasco.

[NB The prime question is how did Thailand come to have such empty foreign reserve coffers?

One answer - by external and independent critical observer – being recognition that with any closed, semi-closed or opaque currency, there was (is) a high likelihood of manipulation of the system.

This being that internally transacted and taken-in foreign currencies exchanged for the Thai Baht (whether: American $s, Australian $s, Canadian $s, British £s, French Franc(s), German Deutschmark(s), Italian Lira and Dutch Guilders, Australian $ and Japanese Yen by incoming wealthy tourists) would very likely be locally be in turn purchased by Thai seniors (individuals and company entities) on more favourable rates. Thereafter possibly held in local personal or company foreign-currency accounts and used on foreign visits in the original dominion countries to fund lifestyle and high-value purchases (jewels to property). Or indeed that foreign currency swapped again into another currency through the Bureau de Changes at such destinations.

Although very probably not illegal, such activities - for obvious personal gain – would have been at the high cost of Thailand's own sovereign monetary strength].

The outcome of such paucity of foreign reserves meant that the Thai Baht was forced to be 'floated' against ASEAN and world currencies, so as to ascertain its realistic value, as opposed to trust in the US$ peg it had previously used.

The high comparative level of foreign debt effectively illustrated the nation to bankrupt almost overnight, so creating a snowball of ever greater devaluation of the Baht on international FX markets and indeed within the country itself.

Other ASEAN countries were soon evaluated, and though with overt foreign-debt levels, were perhaps unfairly viewed to be directly comparable to Thailand's example.

Almost immediately Indonesia was similarly struck with sizeable investor retrenchment and collapsing Rupiah, even though its had a broader economic base. And very irrationally the S.Korean Won was hard hit simply because of trade links to both these countries, so showing the power of fear in little understood nations. Thereafter Hong Kong, Malaysia, the Philippines and Loas were measurably affected even though only the latter two could in any way be considered remotely fragile. Least affected, but still impacted, were Singapore, China, Taiwan, Vietnam and Brunei, themselves unable to escape from the margins of the storm even if it made little sense to be caught up in it.

[NB Herein it seems likely that even with adequate communications, the multi-island geography of the Philippines and Indonesia added to the disquiet at the local level, with millions of small commercial enterprises rapidly raising 'on the street' prices to cover possible devaluation shortfalls, so exacerbating the issue].

Thus the 'hot money' that had entered these high potential countries over a decade and a half was very quickly withdrawn by its foreign owners, so plunging the FX values of those nations concerned.

[NB What is of note was the very speed that such notional investments could be retrieved, suggesting that great swathes had always been intentionally held “very liquid” in cash, shares and short term bonds, and a lesser degree than would be expected transacted into the norms of true long-term investment (ie property, private infrastructure, heavy plant and machinery, offices etc), though these too enjoyed high asset-price gains in the apparent investment frenzy].

The effect on these regional economies was devastating, 'boom' had turned to 'bust'...

The obvious consequences for Brazil was rapid reduction of exportable extracted and agricultural commodities to those affected Asian countries, especially S.Korea which had by then become a global centre of metals processing (using iron ore, bauxite/alumina, copper, silicone) to feed its rapidly expanding automotive and electronics sectors, and the recession damaging new trends in disposable spending, specifically the emergence for fashionable hi-style coffee drinking (using different coffee beans in dry and roasted whole and ground forms and as varied powders).

And importantly beyond that immediate export drop in (B2B and B2C) demand because of ASEAN conditions, the strong comparative inverse rise of the Brazilian Real against the Won, Rupiah. Ringitt and Peso, meant that even any remotely possible quick turnaround in the local fortunes of these SE Asian countries would not provide a similarly quick export rebound for Brazil. This would be seen in the 'write-downs' on Brazilian exporter's income statements and balance sheets, so impacting investor sentiment for a period.

Brazil had twice before in the 19th and mid 20th centuries sought to diversify itself away from the known foibles and economic traps of exporting its plethora of commodities to periodically ravenous and thereafter over-supplied global markets. First Europe, then the USA. Hence the ISI policies that had achieved so much to create internal demand and a more balanced Brazilian economic model.

But, its own Ricardo-espoused national competitive advantage would not be so easility dislodged from commercial reality and so the sizeable exports to the previous “Asian Tigers” would soon be re-routed elsewhere, predominantly China, a new crop of EM countries (MINTS and CIVETS), and even to the quickly recovered 'Asian Tigers' themselves.