As previous host of the
2014 Football World Cup and now 2016 Olympic Games, Brazil continues
to sit front and centre of the world stage.
The Brazilian spirit
behind the country's seeming effortless dominance in football
encompasses both celebration and tribalism, and under this totemic
banner other national teams' fans adopted the Samba Spirit since the
mid 1990s onwards, with a proliferation of Carnival Drums and Mexican
Waves. The Latino Spirit became the de facto spirit of the World Cup
long ago, and indeed could be said to be the instinctive voice of all
peoples.
So, whilst Brazil has
been heavily criticised for its organisational capabilities to
deliver, there appears no better destination to uphold the Olympic
evocation of worldwide goodwill.
“Order and Progress”
are the motto of the national flag, and though questions still abound
about the innate capability to become a notionally 'advanced economy'
given the massive challenges that exist, the last 20 years of
development has demonstrated much.
Given its vast and
often previously intractable distances, the impact of the automobile
in Brazil has been enormous. From the 1920s Ford Model T trucks that
carried cargo of wood and rubber for Ford Model A bodies and tyres
made thousands of miles north, to the notionally “home grown”
1950s pick-up trucks that enabled new possibilities for
entrepreneurialism, to the legendary VW micro-bus which for half a
century between 1960 to very recently carried children and adults to
new schools and modern workplaces, to the 1980s resurgence of the
'Ute' (half car, half truck) which provided for another long era of
entrepreneurialism, to the “big little car” which has been the
staple of personal and family transport since the 1960s ( VW Brasilia and FIAT 147 Panorama) the ideal still popular today in many of the smaller (A to C) segment sizes.
Although vehicles had
been notionally called 'Brazilian' since the late 1920s with the
'finishing' end-assembly of imported American trucks and cars, the
fact is that the country's auto-sector as proper did not begin in
earnest until the planning and practicalities of the 'Import
Substitution' era; which came into being proper in the post WW2
period.
Thereafter, the
end-assembly operations of GM, Ford, and similar original export
efforts of Volkswagen and Toyota was overtaken when the modern scale
industry was effectively born with Volkswagen's large factory at Sao
Bernardo do Campo.
It was completed in
1959 with the Type 2 micro-bus (van, flat-bed and crewcab) its first
product, but that ideal had been born, and planned by the (then) Rio
based government, a decade earlier, with careful industry
diversification planning and foreign producer negotiations.
The auto-sector's role
to progress socio-economic development and so a fundamental part of
the economic 'heavy lifting' had begun as the 1950 post-war ambition.
Now, at the point of
the Olympic crescendo, it could be said that the domestic auto-sector
celebrates its own “Brasil 66”.
Far more detail about
the auto-sector will follow in Part 2, but for the moment it is
important to convey exactly how Brazil developed industrially and
economically, though in a somewhat erratic manner through often very
divergent political effort.
This Part 1 provides
that insight before Part 2 delves relays the major players and trends
of the auto-market over the past century or so and posits the
question as to how Brazil should look to develop the competitive
advantage and so USP of its domestic production in the search for
attractive global exports.
Thus, whilst the
Olympic opening ceremony provided a snapshot of Brazilian history, it
is very worthwhile providing greater pertinent detail of the
country's modern era.
The Politics of
Socio-Economic Development -
The 18th
century saw Brazil's first modern 'export drive' in cotton, sugar and
minerals (including diamonds and gold) largely upon the remaining
Portugese demand and new trading links with England.
The 19th and
early 20th centuries provided the industrialisation
revolution, primarily within the state of Minas Geras and focused
around the trading port of Sao Paulo, so underpinning its second and
far more internationalist export sucesses, including brazil-wood for
dyes, coffee, soya beans, rubber, diamonds, gold, iron ore, orange
juice, fruits and frozen chickens, much headed to the USA and Europe,
and thereafter China and Asia.
The worldwide
depression following the 1929 stock market crash invariably brought
economic malaise and frustration at the apparent failings of 'Old
Republic' politics.
Underpinned by the
Military and 3 states, a coup d'etat took place in October 1930,
exiling the elected president from only seven months earlier.
GetulioVargas was hailed as the new leader and moulded what would be
known as the 'Second Republic'. This action was deemed necessary to
avoid further fracturing of the vital urban–rural
inter-relationship, known as the “coffee with milk” policy, given
the social unrest and demand for worker's rights and representation.
Over much of the
following 25 years (as also seen in Portugal and Spain) Vargas sought
to balance the highly conflicting politics brought about by the
divided popularity of Communism and Facism. Vargas coined the term
“Estado Novo” (the New State) for the renewed ideals.
To quell the anger of
newly urbanised unemployed ex-rural folk - made redundant from
agricultural mechanisation - was the primary theme of “import
substitution”, so toward an attitude of self-development.
Implementation was
through tight coordination fiscal power was centralised within the
government (then based in Rio de Janeiro) with much of the Italian
system replicated for harmonising labour's rights and
responsibilities, to add both economic and industrial stability.
Simultaneously the economic agenda called for far greater
diversification and broad scale full industrialisation to raise
internal B2B and B2C capabilities for internal growth and
improvement.
The ability to close
the substantial gap between itself and the previously industrialised
Europe and America would be crucial in building the motherland. But
with this came recognition that for the most part commodities exports
would for years to come provide the basis from which to expand.
The UN's ECLA (Economic
Commission for Latin America) cited that South America had for too
long structurally relied upon America and Europe, and that positive
but looser ties were necessary to have Latin countries “rise to
their feet” through inward focus and self-reliance. An obvious and
simple conclusion that would prove far harder to achieve via a subtle
balancing act of domestic and foreign interests.
Nonetheless, with
recognition of the importance of steel, and a wealth of coal and iron
ore available to feed the blast furnaces, Brazil's first step would
be the creation of the publicly owned National Steel Company and so
investigations regards location, capacity, the purchase of willing
foreign expertise etc were undertaken.
[NB this would be only
the first step, since all future mid and high value manufactured
goods for domestic and export consumption in the years to come would
be predicated upon enormous start-up costs (build and foreign service
fees) and a massive programme of self-education]
And so in keeping with
ECLA's conclusions, Brazil started to commit to a series of
self-development measures, critically prohibitive import trade
barriers. The people of the country would thus experience a very
visible material stagnation before a latter-day upturn based upon
more and more domestically produced goods.
Brazil largely escaped
WW2, but recognising the shift of power of the allies versus the axis
powers when the US entered in 1942, Vargas provided Brazilain troops
for the Italian Campaign near the war's close. An obvious tokenistic
ploy so as to in return obtain American know-how to develop the long
planned integrated steel plant.
Built in the 1940s and
based in Volta Redonda in Rio de Janeiro state, it would be the vital
enabler for “building tomorrow”. This re-enforced a somewhat
previously soured and tenuous relationship with the USA, and
thereafter Brazil irrevocably sided toward Capitalism over Communism.
The national oil
company Petrobras was also formed in 1953 with the slogan “the oil
is ours” and given sole extraction rights. From the start the firm
expanded its expertise in oil extraction from shale, but was guided
toward deep well land and off-shore drilling for continuity of
supply. A national electrical company and telephone company was
formed by consolidating what had been separate regional private
firms. Record infrastructure spend through public and private
organisations.
The government had
become the country's largest employer and this labour control,
together with the provision of low
interest rate loans allowed the “Import Substitution” policy to
gain ground.
However, within that
sphere the debate regards Trade Protectionism versus an Open Door
policy grew. Vargas's own rural attitude of self-reliance tilted
policy and action toward a devoted inwardness until his apparent
suicidal death in 1954; which Brazil's poor typically blamed upon
'powerful internationalists'.
In 1956 Juscelino
Kubitschek took over as President with the slogan “Fifty Years
Progress in Five Years”. The centre-piece of this was provision of
a new capital city deep in the forest hinterland. Called Brasilia it
acted as a shining beacon of development, with no doubt the ability
to maintain control from a distance with less fear of another coup
d'etat. His economic advisor was Celso Furtado, a man well known by
neighbouring nations through ECLA , with a distinct pro pan-Latino
sentiment.
Whilst imported vehicle
'finishing' and 'end-assembly' work had been seen in the 1930s and
1940s, the time had come to properly create the foundations of a
Brazilian motor industry. Special treatment of foreign auto-makers
was provided to gain FDI, the now home-built vehicles providing a
major boost to the idea of 'import substitution', even if effectively
the same foreign vehicles.
A major programme of
road building and associated infrastructure was undertaken to create
a virtuous circle of mobility, better organised and stepped
value-creation and so economic development and thus the idealised
spread of wealth. Inevitably that miracle-growth also brought
inflation and corruption.
In what remained of the
old, and critically burgeoning new, private sector one landmark was
the development of the indigenous auto-sector. This allowed many
associated parts supply and services firms to flourish, and was
kick-started by the first major auto-plant built by Volkswagen,
producing the Type 2 van and soon after the Type 1 “Beetle” /
“Fusca”. Brazil as a commodities-rich region could then provide
for the full manufacturing value-chain from sheet steel in body
structures to the silica in glass production to the rubber in tyres
and suspension bushes to the chromium for the plating of decorative
trim items.
[NB This industrial
platform was the base for later industrial extrapolation into other
engineering areas such as bus and coach specialisation, railway
carriages, subway carriages, niche specialist vehicles, weaponry and
aeronautical].
In period additional
efforts were made in old industries such as textiles to raise scale,
improve quality and reduce price for mass affordability.
However, the visible
gains of wealth were seen not by the many but the few, the Brazilian
elite and new middle classes, but given that sizeable portions of the
populace and labour market were still rural. Bot here and in the
industrialised centres, the high supply of low skilled labour greatly
surpassed general demand, so maintaining a trend for low and poor
wages.
General Branco was
favoured by Congress and it was believed that a new 1965 election
would suffice. But having seen the foibles and corruption of civilian
rule, Branco et al abolished the mass of competing political parties
to create the singular 'ARENA' party; itself shadowed in opposition
by one other, the 'MDB'. A more authoritarian yet arguably
controllable system was put in place to provide strong and direct
party links throughout Brazil, with greater proportion of the
country's revenues retained for central spend from Brasilia. The rife
50% annual inflation rate was tamed through fiscal reform and
monetary restriction, whilst a strong anti-Communist attitude also
prevailed to maintain stability.
An even more
'hard-line' rule followed Branco, under General Costa e Silva with
economic recommendations from of Antonio Netto (ex-University of Sao
Paulo). Netto 'pump-primed' the agriculture sector with negative and
low rate credit (obtained via the nation's pension fund and various
foreign loans) so creating a fast growth period between 1968-1974
averaging a 11% rise per annum, even though at the direct cost of
government coffers. Production costs were reduced through the control
of wages, with exports highly promoted.
General Medici came
next, continuing Netto's programmes but with new focus upon new
development within the Amazon. Political repression ensued to avoid
destabalising the successful economic formula, which in turn expanded
national pride across much of the demographic spectrum.
Medici was followed by
General Geisel with a decree to re-introduce full democracy, and to
tackle the problems of stagflation and vitally the high cost of
petroleum. Borrowing from the domestically sourced (Petrobras)
petro-dollars which has provided a substantial cash cushion and
international capital markets to invest into yet more state sponsored
projects to restart growth. Thus state owned companies had become
even more predominant, from banking to mining.
However it was this
expanded initiative, together with municipals' budgetary over-spend
which re-sparked the high inflation trend, a consequence of
monopolies, oligopolies and bureaucracies devoid of the usual
periodic imperative for cost-cutting seen in competitive
free-markets.
A critical outcome of
such state control and captive markets and buyers, was that without
true competition prices were set to ensure strong annual profits,
with in leaner years, product and service quality dropped at constant
prices to ensure those large profits.
The reinstated
democracy saw a promotion of oppositional power across the regions,
and with that the loss of focused central-control, the dispersal of
now more autonomous regional funds spend in a more profligate way,
the consequence of diluted political responsibilities. The subsequent
increase in governmental costs and increased corruption amongst
democratically elected civilian leaders at the local level only
served to snowball economic woes.
Another phase of
stagflation appeared and by 1982 FDI had effectively stopped. The
ability to serve the internationally borrowed national debt pile had
become an enormous problem and the 'Lost Decade' arrived.
An ex-auto worker then
became prominent, when Luis Inacio da Silva (or “Lula”) and
followers broke the engrained governmental control over labour
rights. Along with the Catholic Church and others the mass feeling
was that the once rightly controlling military rulers had themselves
become “lax behind the wheel”. 'Lula' helped form the Worker's
Party (PT) with other labour-orientated parties created, prompting
“diretas ja!” (“direct elections now”). Disparate new
ideologies also undermined militaristic singular rule and so a
fragmentation the in-power of the in-situ PDS party.
This economic paralysis
undermined the Military's previous leadership and “right to rule”,
with subsequent political reforms passed to try and create a new era
of hope.
In March 1985 Jose
Sarney took charge when the president-elect died. Sarney was a
civilian who had previously been head of a military aligned party,
facing the ongoing state of severe stagflation. A set of young
economists presented the Cruzado Plan which once again froze wages
and prices whilst increasing the income of the lowest paid. New B2C
and thus B2B demand re-filled what had been idle excess industrial
capacity, and with return of better times Sarney became popular. But
as the economy recovered and new capacity was required to fulfil new
additional demand, Sarney refused. Instead he seemed to support the
age old spectre of profiteering through high demand out-stripping
limited supply. The resulting price rises and led again to rabid
inflation and once again to a fractured the national economy. By the
time of Sarney's departure in 1990 inflation was running at a an
unbelievable hyper-inflation rate of 80% per month!
New President Fernando
Collor de Mello sought to initially tame this by temporarily freezing
all savings accounts, so as to re-inject cash back into the
disfunctional, badly priced, economy and toward productive ends. The
remaining elements of the “import substitution” programme was
repealed, and privatisation of industry and an 'open door' foreign
trade mentality resumed. The long era of state-led growth aided by
protectionism was coming to an end. The strength of the military was
cut in reaction to the end of the super-power's cold war friction,
and mproved relations were nurtured with Argentina. The Latin Common
Market 'Mercosul' Pact was agreed with Argentina, Uruguay and
Paraguay, thus providing both improved cross border access and
improved competition to counter profiteering. But economic problems
remained and Collor was impeached from office for corruption.
Thereafter this
neo-liberal stance continued under the short tenure of Itama Franco
who sought to quell the still virulent 20% monthly inflation rate. He
appointed Fernando Henrique Cordoso as Head of the Treasury, and many
of the previous Cruzado Plan's authors returned as new advisors. A
new “Real Plan”stabalisation programme was named after a new
currency, itself a faith-based anti-inflationary instrument.
The Real Plan did
indeed provide results, especially for the urban poor. Cardoso had
previously studied how Latin America's historical economic relations
with the advanced western nations had meant that countries such as
Brazil had been locked into such dependency. Instead he sought a
dualistic approach, an economy with less direct dependence upon the
old world capital hubs of New York, London, Milan etc (echoes of
ECLA), and a new path toward broader international relations with
new, more mutually positive EM trade arrangements and financing.
New political
regulations were installed allowing 'provisionary measures' to take
long term effect as long as Congress did not object. The Real Plan
was then instituted every 30 days for 13 months until Congress passed
the necessary legislation. Cardoso is today seen as the man who broke
the previous historical vicious circularity whereby national deficits
were partly paid-down via tacitly accepted inflation but thereby
re-energising the inflationary spiral.
As the prime mover in
addressing Brazil's economic problems, Franco was democratically
succeeded by the popular Cardoo (or 'FHC') at the beginning of 1995.
His reform agenda reached into every sphere of government and
continued to promote private commerce, with mantras of reduced public
spending and much improved efficiencies. State firms were privatised
and to supervise the possible greed of new private companies new
regulatory bodies were created per industrial sector to ensure
accordance to laws and by-laws and to guard market fairness.
In 2002 the previously
heralded “Lula” (Luiz Inacio Lula da Silva) of the Worker's Party
won the election. Given his background, this apparent marked “shift
to the left” greatly concerned the capital markets, creating an
initial reflex action of spiralling borrowing rates and so inflation
expectations. However Lula resolved to maintain the 'open door' trade
policy, fiscal budget responsibility of 'FHC' and vitally suppress
inflation, so calming the economic environment.
What was fascinating
was that with an ongoing strong growth story, improved welfare
programmes, expanded employment opportunities, improved earning power
for many at the bottom and access to consumer credit, meant that Lula
was relatively unscathed by apparent involvement in the 'Mensalao
Scandal' (the origins and routing of politically supportive funding).
For the masses it seemed that his professional indiscretions were as
nothing compared to the greater good achieved in running the country.
'Lula' won a second
term in office in 2006 with an approval rating of 80%, and continued
efforts at expanding infrastructure building, and improved wholesale
and consumer credit. All was fine until the 2009 Financial Crisis
when growth dramatically slowed and initiatives such as tax relief
was provided for the automotive and construction, so staving off the
initial impact of the crisis. He has also sought to grow Brazil's
relations worldwide, refusing to bow to the pressures of 'western
friend or foe' orthodoxy, and so greatly raising Brazil's stature
with other EM and 'Pioneer' countries.
In 2010 fellow Worker's
Party representative Dilma Rousseff won the Presidency, as the first
elected female leader. With the manifesto of continuing to sail a
steady course, her immediate challenges in office were to react to
the European Sovereign Debt Crisis' effects upon Brazil and the
delayed return of strong trade with the USA given its own lengthy
post 2008 malaise; to ensure the 2014 and 2016 World Cup and Olympics
'delivery cities' would be well planned. Additionally her “Brazil
Without Poverty” policy seeks to improve the lives of the remaining
16m people at the very bottom of the social scale, with other targets
at poverty related child welfare and the broad use of qualification
certificates to engender education and personal development.
However, the initial
low level criticism about initial failures of these programmes, in
2013 became over-shadowed by mass protests. These were directed at
apparent failures in transportation (primarily bus fares), healthcare
services and educational services.
She won a second term,
but with another wave of protests in 2015 regards the 'social stasis'
and her involvement in the Petrobras Scandal – protest actions
deliberately directed at the Olympics and its diverted monies - her
approval rating has plummeted.
Synopsis of Today -
For all the hype and
true goodwill of the Olympic Games, Brazil today sits in real fear of
economic retrogression. Today's problematic picture foretold by the
horrific drop in the country's Bovespa stock market in preceding
years, as the commodities export slump took hold with ripple effects
through business, consumer and government circles. The Bovespa seeing a strong rally in 2016 in the run-up to the Games, but uncertainty about ongoing traction thereafter.
Exactly how to maintain this positive trend will require clear insight, when the Brazilian temptation
may be to taint or even discredit the ideology of globalisation, and
possibly once again look inwards and backwards to the era of
self-reliance, protectionism as the
apparent answer.
However, Brazil is a very
different place today, with far greater commercial and economic
diversification, segments which
themselves have grown by being export seeking, and good diplomatic
relations with all the G20 countries and far beyond.
What should be
recognised by the Brazilian government is the level of economic
'heavy lifting' the indigenous automotive sector has achieved over
many past decades, its steady 'self-fulfilling' domestic demand
obviously also supported by exports to foreign shores.
When Vargas moulded the
ideals of the Brazilian automotive industry it was for domestic
consumption and growth. Today, beyond the social outcries and Olympic
cynicism, and beyond the news stories about the Petrobras Scandel,
Brasilia itself needs to consider how to better reshape the
auto-industry to befit a bigger mutual vision of Brazil's own needs and its
role in “Tomorrow's World”.
To Follow -
Part 2 will look to the
fundamental historic character of the Brazilian auto-sector, and
posit how that character might be better evolved and itself exported.
