Unknown to many outside Brazil, the cultural significance of cachaça, a distilled liquor, ranks among soccer, carnival, and samba. Although non-Brazilian’s compare cachaça to rum, their only similarity is that they both originate from sugarcane. Cachaça first gained popularity among slaves and peasants during Brazil’s colonial period but the spirit has recently become a favorite domestically and internationally regardless of the drinker’s class. Also, Brazilian cachaça exports to Europe and the United States have been aided by the trendy drink caipirinha. The cocktail’s global success has inspired other Caribbean and South American states to produce their own cachaça-like alcohols. Consequently, the Brazilian government has initiated protectionist measures at home and abroad to preserve cachaça’s foreign markets. These developments bring together cachaça’s trade, cultural, and environmental aspects.
Category: Brazil's economy
Eike Batista jumped 53 spots in Forbes magazine’s annual list of the world’s richest people and had its biggest increase in net worth as the value of his oil, mining, energy and transportation companies soared. Batista, 53, is the world’s eighth-richest person, with a net worth of $27 billion, Forbes said. That’s an increase of $19.5 billion from last year, when Forbes ranked him the 61st richest individual. Mexico’s Carlos Slim beat out Bill Gates and Warren Buffett for the top spot on the list, becoming the first person from outside the U.S. to lead it in 16 years.
Rio and Brazil stand to benefit even more from holding the 2016 Olympics than China and Beijing did in 2008, experts say.
For Brazil, winning the opportunity in late September to host the 2016 Summer Olympics in Rio de Janeiro probably represents many of the same things that the 2008 games did for China: a chance for the world to see that it is now an influential, modern country and a way to showcase — domestically and internationally — its remarkable economic growth. But do cities benefit as much from hosting the games as local residents and businesses alike are led to believe? Is the return on investment high enough to warrant the months, if not years, of preparation? And what lessons, if any, can Beijing offer Rio and other future Olympic hosts?
There are no easy answers. One year after Beijing was host to sports stars from around the world, some analysts question whether China’s capital city and all the stakeholders involved benefitted greatly from the games. Yet the feel-good factors are hard to ignore. For one thing, the Olympics seem to have been useful for China from a marketing perspective, in terms of rallying people within the country and raising global awareness about “Brand China.” Simon Anholt, a government-reputation adviser who produces the 50-country Anholt-GfK Roper Nation Brands Index, a global public opinion poll on country reputations, says early results from his latest research suggests that after several years of decline, China’s index ranking has begun to improve following its Olympics experience.
Observers also note that the timing of the 2008 event augured well for the organizers, saying the combination of public and private spending for the games may have acted as an early stimulus program before the global economic downturn began making a deeper impact later that year. “The global financial crisis overshadowed the Olympics, but from a Chinese perspective, the crisis was an external threat and the nationalistic orgy of the Olympics gave [Chinese] leadership an extra boost in fending it off,” says Edith Terry, managing director of Cotton Tree Productions, a Hong Kong-based consultancy for East Asian business and public affairs.
The government also used the games as a catalyst to clean up many environmentally unfriendly industries all over the country and to increase spending on public infrastructure, including transportation. “The Chinese government very cannily used the Olympics as a way to push environmental change in China,” says Shaun Rein, managing director of the China Market Research Group, a Shanghai-based market research consultancy. Even Greenpeace, the activist environmental non-profit, gives Beijing high marks for its clean-up efforts, including new standards for vehicle emissions, five new subway lines and a fleet of nearly 4,000 buses running on clean-burning compressed natural gas.
GETTING THE JOB DONE
But is this simply blurring the lines between what was the result of the Olympics and what should have been on the government’s to-do list anyway? “It is true that Beijing is cleaner and more so because of [the Olympics]. But the government did not need an excuse to do all these [things],” says Lin Bo Qiang, a professor at the Center of China Energy Economics Research at Xiamen University.
Jonathan Anderson, head of Asia-Pacific economics for UBS, says that Beijing is such a small city relative to the rest of the country — representing 2.5% of national GDP and 1% of the population — that the economic impact of the event was limited. “It was just too small of an event to really matter.”
And not all public relations was good. “The China brand got a lift as a result of the games mainly because of the flawless execution. So the positive perception is definitely one about Chinese capabilities in getting things done,” says Minxin Pei, a professor of political science at Claremont McKenna College in Claremont, California. “The facilities were finished on time and the games went on without a hitch. That’s good news. The bad perception is about credibility — the use of the ‘fake’ girl during the opening ceremonies [who lip-synched a song] and the controversy over the underage women gymnasts. People wonder whether there is something funny going on with the China brand.”
Other incidents put the PR acumen of various global sponsors to the test. Threatening to scupper their well-choreographed sponsorships, pre-game protests outside China over human rights issues in Tibet and Darfur, Sudan, with disruptions to the global torch procession in Paris and elsewhere. In what became a politically sticky double threat, some sponsors found themselves caught between the risk of an international boycott of their products for supporting the Beijing games and the risk of a domestic backlash by the Chinese if they withdrew.
Opinions regarding the return on investment for corporate sponsors are also divided. “Consumers didn’t really care and they didn’t really know who the official Olympics sponsors were,” says Rein, who says many sponsors weren’t happy with their return on the Olympics. Yet Scott Kronick, president of the Ogilvy Beijing Group of Ogilvy Public Relations Worldwide, notes that sales for two of the firm’s clients who sponsored the Olympics – Adidas and UPS – grew dramatically during the games, and UPS has already signed on for the 2012 Summer Olympics held in London. “Post Olympics, I did not hear any sponsors regretting the sponsorship,” he says.
For Sam Taylor, president of Reputation Dynamics, a New York-based corporate social responsibility (CSR) consultancy, part of the difficulty for sponsors was the result of an ad hoc approach to CSR. “At the last Olympics, some companies had fragmented approaches toward developing social responsibility programs and aligning them around causes,” she says. One of her key lessons: Clear, consistent communications about the aim of their CSR programs at such events is critical. “While the Darfur situation clouded the Olympics, sponsors should not have been pressured by the activists and [should have] continued to communicate and vouch for their commitments to the CSR agenda,” she says.
Domestic and regional sponsors may have received a greater return on their investment. “For companies in emerging markets, Olympics sponsorship has become a badge of honor and ‘graduation party’ — much the way it has long served for national governments,” says Terry of Cotton Tree Productions. “At least one of my clients, Chaoda, which supplied vegetables to the Olympic village and other venues, has made its ‘Olympic mission’ central to its marketing before and after. I suspect others are doing the same.”
THE GAMES PEOPLE PLAY
For host cities generally, sponsorship seems to be a mixed blessing. A number of studies by academics and consultants suggest that Olympics-related economic growth is often a case of wishful thinking, and that positively-spun scenarios often don’t differentiate short-term consumer spending from long-term growth. Notably, cities are often left with costly yet unusable Olympics infrastructure once the party is over — dormitories, specialized facilities, an oversupply of hotel rooms, to name a few. Although cities have learned from past mistakes and there is more effort to convert facilities to new uses — Atlanta, host of the 1996 Olympics, for example, ended up with $500 million of new, privately funded public buildings and a 21-acre park — the ability to cut losses is different from a genuine economic gain.
For Beijing, the financial and human costs of the 2008 Olympics were enormous:
More than 600,000 residents were displaced as old neighborhoods were razed to make way for the Olympic venues. And while the legacy includes new subway lines, a new state-of-the-art stadium and a swimming and diving center, so far, only one event has been held in the 91,000-seat stadium — a massive opera production — and there is some talk that it could eventually be converted into a shopping center.
Other host cities have much less to show for their efforts. The games in Athens — costing approximately $14 billion — went so far in the red that the bills are still being paid, amounting to the equivalent of $70,000 per household, according to an estimate by U.K. newspaper The Independent. It took Montreal’s residents until 2006 to pay off the $1 billion their 1976 Olympics cost.
For the hosts’ countries, the value may be more positive, given that PR is managed well. Anholt says tourism in Australia jumped after the 2000 summer games in Sydney, in part because of a post-event publicity campaign touting the games’ success. But for every Australia, there’s a Greece, he notes. Greece failed to capitalize on the twin successes of the Athens 2004 games and its hosting of — and victory in — the European football championship that same year, “its greatest PR opportunity since the sack of Troy,” he says. “The only messages Athens gave me when I watched the games were: We can afford a lot of fireworks; we are very proud of our heritage; we are better organized than you think” — in other words, nothing that raised its profile among other countries.
But despite the risks — such as PR campaigns coming unstuck — the upsides of hosting the Olympics outnumber the downsides, particularly as the world climbs out of the economic downturn. A recent study by two economists — Andrew Rose of the University of California, Berkeley, and Mark Spiegel of the Federal Reserve Bank of San Francisco — found that after an Olympics, host countries’ export trade generally increases. In an examination of 196 countries’ economic performance between 1950 and 2006, they found that former Olympic host countries tend to have 30% more exports than the average, non-hosting country, a correlation they found to be “statistically robust, permanent and large.” Not only that, “the games do not seem to act as simple export promotion, but are instead associated with an increase in two-way trade between the host and the rest of the world,” they write in their April 2009 paper, “The Olympic Effect.” Rose and Spiegel speculate that the games constitute a positive — albeit expensive — global signal that the country is serious about attracting foreigners and foreign business.
Another big event, soccer’s World Cup, has similarly attractive results. Non-sporting spectaculars, such as a World’s Fair — which Shanghai is hosting in 2010 — are also positively associated with national economic growth. Timing is important, however. The Olympic findings seem to hold true only for games held in the summer rather than winter. The economists suggest that the effect is partly because the spending and TV viewership of the winter games tend to be smaller, and the events are hosted by relatively small towns, such as Lake Placid in New York or Albertville in France.
BRAZIL’S RISKS — AND OPPORTUNITIES
If Rose and Spiegel are right, Brazil has already won. However, as the apparently differing fortunes of Athens and Beijing suggest, there is still a lot of room for an Olympics to be more or less successful, particularly at the city level.
Economically, the risks for Rio seem higher. In terms of GDP, Rio is more important to Brazil than Beijing is to China. Rio is Brazil’s second-largest city and is home to about 3 percent of the country’s population — about six million people out of a total of 174 million. Beijing has a population of 17 million, but China’s total population tips the scales at 1.3 billion. Indeed, UBS’s Anderson agrees that the Rio games are likely to have a “relatively” greater impact on the country.
In public relations terms, Brazil’s prospects seem good. The country will have already hosted the World Cup in 2014, giving it a chance to build on its successful experience with the 2007 Pan American games. A growing number of first-rate Brazilian multinational companies will be able to use the Olympics as a showcase for investors. Finally, the games will also be an important opportunity to introduce Brazil to more tourists, both within and outside of Latin America.
Unfortunately, the tourist potential may also be the Rio games’ key risk. As in the rest of Brazil, Rio has extremes of wealth and poverty. Despite a growing middle class, it still has vast numbers of poor people, and crime against tourists — particularly during high-profile, public events like the annual Carnaval celebration — has increased steadily. (According to a report on the U.S. Department of State’s web site, in the weeks leading up to this year’s Carnaval, “robbers ransacked two tourist hostels.”) Guaranteeing the safety of visitors without oppressive security will be difficult, observers predict. “I think this is potentially something that is going to tarnish the games,” says Mauro Guillén, a Wharton management professor.
Eduardo Musa, president of Caloi, a Brazilian sporting goods retailer, says he thinks hosting the games will be useful politically because it’s a project that comes with a deadline, giving the government a push to complete the necessary infrastructure on time. Unlike China, which has undertaken vast improvements in its infrastructure over the past decade, such improvements are still a pressing need for Brazil, experts say. Infrastructure upgrades are needed not only within Rio, but around the country. For instance, most international flights are routed to Sao Paolo, 350 km (220 miles) to the south, not Rio, partly because of the size of the airport. In general, it’s not easy for middle class tourists from other South American countries to visit Brazil because of the country’s poor infrastructure.
Making those improvements won’t be easy. While civic pride may take hold in Rio as it did in China, the governments are quite different. China is an authoritarian state, but Brazil is a federal democracy, subject to the kind of political and economic power struggles familiar to Americans. Building the infrastructure for the games — particularly infrastructure that will disproportionately benefit one state — may not be easy, warns Gerald McDermott, a former Wharton professor who is now a professor of international business at the University of South Carolina.
On the ground in Rio, the games are viewed by some as a ‘coming-of-age’ party for both the country and the city. For the past 50 years, since losing its status as Brazil’s capital to the new city of Brasilia, Rio has foundered somewhat as it tried to find a new identity for itself, according to Arminio Fraga, CEO of Rio-based Gávea Investimentos. With the Olympics, he hopes that’s going to change. “It’s very hard for a lost city … to find a new way,” Fraga notes.
McDermott says he hopes Brazil will also be savvy in using the games as a way to tighten relations with its key trading partners — the MERCOSUR group, which includes Argentina, Paraguay and Uruguay. Most of South America’s other major countries are also associated with Mercosur: Venezuela is applying for full-member status, and Bolivia, Chile, Colombia, Ecuador and Peru are associate members. Musa, however, believes that hosting the games is not likely to bring Brazil closer to other countries in Latin America — and he argues that this is a good thing. “Brazil is on such a different level from the rest of Latin America; a project like this will [magnify] even more the difference between Brazil’s potential and the other countries’,” he says. In his view, seeing a successful Olympics may encourage places such as Hugo Chavez’s Venezuela to rethink their present path.
Ultimately, observers say, how successful the Olympic games are depends on how well Brazil can execute the program. “One knows from the other countries that these things are what you make of them, and it is no different here,” says Fraga. “There are risks and challenges, but my impression, being here, is that enough people are engaged for this to be a significant positive in the end.”
Republished with permission from http://www.knowledge.wharton.upenn.edu — the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
State-run Petrobras is poised to become a major global player
By Juan ForeroWashington Post Foreign Service
Everything about the shipyard here is colossal — the 4,000-man workforce, the billions sunk into it in capital costs, the half-finished 10-story-high production platforms.
But then, so is the challenge facing Brazil’s state-controlled energy company, Petrobras: developing a group of newly discovered deep-sea oil fields that energy analysts say will catapult this country into the ranks of the world’s petro-powers. The oil pools are 200 miles out in the Atlantic and more than four miles down, under freezing seas, rock and a heavy cap of salt.
Petrobras, which until recently was little known outside oil circles, has launched a five-year, $174 billion project to provide platforms, rigs, support vessels and drilling systems to develop tens of billions of barrels of oil. Energy officials here project that Brazil — still an oil importer five years ago — will in the next decade have one of the world’s biggest oil reserves.
“It’s going to change the role of Brazil in the geopolitics of oil,” Petrobras’s president, José Sergio Gabrielli, said in an interview at the company’s headquarters in Rio de Janeiro. “We are going to become a much bigger producer.”
Petrobras estimates that production in Brazil could reach 3.9 million barrels by 2020, up from more than 2 million a day now. Proven oil reserves would rise from 14.4 billion barrels to more than 30 billion barrels, according to government estimates, putting Brazil in the same league as such major oil exporters as Qatar, Canada, Kazakhstan and Nigeria.
The new discoveries in Brazil’s offshore “pre-salt” region do not mean that the country will become a major exporter of crude, according to Gabrielli. He noted that Brazil’s economy, which is the world’s eighth-largest and is steadily growing, is expected to consume much of Petrobras’s projected production. But, he added, as the country meets its own needs, it will also develop for export refined products such as gasoline, diesel and biofuels.
In an era of drum-tight supply, the discoveries off Brazil’s coast and Petrobras’s growing stature are changing the world’s oil balance, because few regions outside the OPEC countries are expected to generate significant growth in crude production, said Michelle Billig Patron, senior director of political risk for the New York-based Pira Energy Group.
“There is really only Canada and Brazil when you’re talking about a million barrels a day more in growth over the next 10 years,” Patron said.
A firm hits it big
The engine of that growth is a multinational that, for much of its 56-year history, was little more than a trading company. It pumped a few thousand barrels a day almost as a side note to its real function, overseeing oil imports. Then in 1974 — a time when oil shocks had alarmed Brazilian officials — came a major discovery: the offshore Campos Basin, east of Rio.
“Petrobras, before Campos, produced 180,000 barrels a day,” said João Carlos de Luca, a former Petrobras executive who is president of the Brazilian Petroleum Institute, which represents foreign oil companies here. “After Campos, it was a company that searched for self-sufficiency in production.”
In its drive to produce, Petrobras became a leader in offshore production. The Rio-based company is now responsible for more than a fifth of the world’s deep-sea operations, more than any other company, Gabrielli said. It operates in 26 countries and drills off the African coast and in the Gulf of Mexico.
With a market capitalization of more than $220 billion, Petrobras is one of the world’s 10 biggest companies. Over the past two years, it has been the most frequently traded foreign company on the New York Stock Exchange, trade data show. Among investors bullish on Petrobras is George Soros, who last year made the oil company the largest single holding in his investment fund, according to Bloomberg.
Still, the company remains firmly under the control of the state, with President Luiz Inácio Lula da Silva calling it a national icon whose fortunes are intertwined with Brazil’s.
Though private investors control nearly 60 percent of Petrobras stock, the Brazilian government has 56 percent of the voting rights. Seven of its nine directors are from the government. The board’s chairwoman is Dilma Rousseff, a Lula confidant who is expected to be the ruling party’s candidate in next year’s presidential elections.
The Lula government is now seeking passage of a law to give Petrobras control over future projects in the newly discovered fields. Foreign companies have explored for oil in Brazil since 1997, but the proposed regulations would limit their ability to make major decisions involving the new oil pools.
Gabrielli said it is logical to make Petrobras the operator, with a mandatory 30 percent stake in each project, because Brazil took the risks to drill for oil in the pre-salt. But he noted that companies such as Exxon Mobil, Britain’s BG Group, Royal Dutch Shell and Spain’s Repsol are investing billions to develop their share of the new projects.
Luca, the president of the association representing foreign companies, said Petrobras may overextend itself. “We could be limiting the development,” he said.
Far out and deep down
The entire pre-salt region is laced with “elephant fields,” pools holding at least a billion barrels of oil each. Tupi, which in 2006 was the first field found, holds up to 8 billion barrels.
Despite the optimism that Petrobras officials display for visitors, they reel off the challenges: shifting salt, 6,500 feet of it, and working fields so far from the coast that they cannot be reached by helicopter.
Much of the new infrastructure needed to develop the pre-salt is being built here at Angra, and at other shipyards dotting the coast. On a recent day, decked out in a bright-orange jumpsuit and helmet, Roberto Moro, a mechanical engineer, strolled amid giant pontoons weighing 6,000 tons each. He explained how they would be latched together, then topped with a 14,000-ton deck the size of a football field.
The final product, a platform called P-56, will cost $1 billion, he said. And Petrobras will need a fleet of them. “Each platform we are building here, like P-56, represents 10 percent of national oil production,” Moro, 46, explained. That is the equivalent of 180,000 barrels.
Photo by Pedro Kirilos/Riotur
By VICTORIA GOMELSKY, from The New York Times
Rio is expected to attract billions in public and private investment over the next few years.
RIO DE JANEIRO — On Alexandra Daly’s most recent visit here in May, she was booked into a hotel across the street from the most happening stretch of Ipanema beach. The perk, however, proved irrelevant. Ms. Daly had not bothered to pack a bikini.
“I had nine meetings in one day,” said Ms. Daly, a hedge fund marketer, whose London-based company, AA Advisors, works with about 35 major Brazilian investors. “I don’t even have days like that in New York. When you’re talking about Rio, people think of samba, Sugar Loaf mountain and the beach — not the billion-dollar investment industry.”
The conventional view of Brazil’s two largest cities is that São Paulo, with its banks, commerce and industry, got the brains, while Rio, with miles of crescent-shaped beaches, Carnival revelers and picturesque bay, got the looks. But the truth is that the “Marvelous City,” as Rio is known, is increasingly a serious destination for business travelers.
Brazil’s growing standing among global financiers is one explanation. Poised to become the world’s fifth-largest economy by 2016, the country has emerged from recession virtually unscathed, earning the envy of its Group of 20 cohorts.
São Paulo is the center of the boom. But Rio brings plenty of opportunities to the table, not only with its core oil and natural gas businesses, but also in financial services, technology and telecommunications.
An August 2009 study, “Decision: Rio Investments 2010-2012,” published by the Rio de Janeiro State Federation of Industries, predicted that public and private investment would pump $60.3 billion into the state over the next three years, not counting the additional $14.2 billion budgeted for the 2016 Olympic Games.
“I would dare to say that, probably, we have the biggest concentration of billion dollars in investment per square kilometer in the world,” said Cristiano Prado, the author of the industry federation’s study. “And more will come together with the Olympic Games in the next years.”
Not since 1808, when the Portuguese monarchy sailed into Guanabara Bay, fleeing Lisbon ahead of Napoleon’s army, has Rio seen such a spectacular influx of wealth. And not since 1960, when Rio ceded its capital status to Brasília, setting off an exodus of businesses and a half-century of urban decline, have Cariocas, as Rio’s residents are called, had a reason to believe the wealth would return.
“There is hope that with a government that is more pro-business, more things will happen in Rio,” said Ronaldo Veirano, founding partner of Veirano Advogados, a Rio-based law firm that worked on the federation’s study. “Hotel chains are now thinking seriously about their capacity and authorities are investing in infrastructure. I don’t think Rio will ever be another São Paulo but I think it could recover some of its glamour.”
The most conspicuous hurdle is an epic crime problem that has branded Rio one of the world’s most dangerous cities. On Oct. 17, for example, drug-trafficking gangs inside a favela, or slum, shot down a police helicopter in a series of clashes that left three police officers and at least 23 others dead.
Government leaders are eager to project a different image to the business community. “Clearly, the model we have is Barcelona,” said Felipe Góes, Mayor Eduardo Paes’s secretary of development.
Like the Spanish city, which cleaned up in time to be host for the 1992 Olympics, Rio hopes to reinvent itself for the Games. Presiding over the transformation is the billionaire Eike Batista, a mining magnate whose EBX Group has interests in real estate, energy, oil and tourism.
One of Batista’s pet projects is the deluxe restoration of the venerable Hotel Gloria, a 1920s landmark five minutes from the city center, where two of the largest corporate players in Brazil, Petrobras and Vale, still have their headquarters. The opening of the refurbished hotel is planned for 2011.
Other hoteliers have taken notice. Rio’s grandest property, the 86-year-old Copacabana Palace, introduced its sleek new Bar do Copa in March.
Meanwhile, the two-year-old Hotel Fasano in Ipanema boasts the stylish Baretto-Londra Bar designed by Philippe Starck.
Another newcomer is the year-old Hotel Santa Teresa, set in an acre of gardens in the artsy, hilltop enclave of the same name, just 10 minutes from downtown but far away in atmosphere.
“The advantage is we have only 44 rooms, 4,000 square meters and 150 tropical trees on the property,” the general manager, Mark Birchall, said. “You feel almost as if you’re in the mountains.”
In general, Rio’s accommodation capacity, currently 28,000 hotel rooms, is expanding at the rate of 1,000 rooms a year, said Paulo Senise, executive director of the Rio Convention & Visitors Bureau.
“The idea is to increase that to 1,500 to 2,000 per year for a total addition of 14,000 hotel rooms by the Olympics,” Mr. Senise said.
Overcoming its reputation as a parochial party town looks to be Rio’s biggest challenge domestically. In São Paulo, the locals, known as Paulistas, have long derided Rio for its supposed lack of sophistication. Many recent visitors, however, insist that Rio offers plenty of fashionable dining and nightlife options, from the baroque antiquarian bars and clubs of Lapa, near downtown, to the posh beach cafes of Ipanema, Leblon, and Barra da Tijuca.
“In terms of service, you are not lacking in Rio at all,” said Ted Rogers, a Washington-based venture capitalist who has done business in Rio since 2006 and blogs about it at http://www.vc-brazil.com. “I’d argue that the way the city is laid out, you have easier access to the places you want to go than in São Paulo.”
International access is set to improve Dec. 15, when US Airways begins direct service to Rio from its hub in Charlotte, North Carolina, the largest banking headquarters in the United States after New York City.
For all its current mojo, however, Rio faces one inescapable deterrent to sober-suited business development. Riotur, the government-owned tourist office, spells it out in its colorful introductory guide: “It is very difficult for anyone who visits Rio to resist the appeal of its 86 kilometers of beaches.”
That is more than 50 miles of beaches.
Mr. Rogers, for one, doesn’t even try. He said his best business days began with a run on the beach, followed by a quick swim. The routine, he said, puts him “in a relaxed but energized mind-set.”
“It’s hard to stress about business when on the beach in Rio,” he said, as he planned a return trip to the city at the end of October. “And by the end of the weekend, it is equally hard not to feel rejuvenated.”
But let’s hope that when the cameras aren’t rolling Mr. Obama and his hosts engage in some frank talk about currency policy. For the problem of international trade imbalances is about to get substantially worse. And there’s a potentially ugly confrontation looming unless China mends its ways.
Some background: Most of the world’s major currencies “float” against one another. That is, their relative values move up or down depending on market forces. That doesn’t necessarily mean that governments pursue pure hands-off policies: countries sometimes limit capital outflows when there’s a run on their currency (as Iceland did last year) or take steps to discourage hot-money inflows when they fear that speculators love their economies not wisely but too well (which is what Brazil is doing right now). But these days most nations try to keep the value of their currency in line with long-term economic fundamentals.
China is the great exception. Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They’ve done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
What makes China’s currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.
But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge.
That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China’s surplus and America’s deficit, have recently been much smaller than they were a few years ago. But, they argue, “these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen.”
Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn’t needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.
But with the financial crisis abating, this process is going into reverse. Last week’s U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.
So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I’d be really worried about that prospect.
Unfortunately, the Chinese don’t seem to get it: rather than face up to the need to change their currency policy, they’ve taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.
And I’m not sure the Obama administration gets it, either. The administration’s statements on Chinese currency policy seem pro forma, lacking any sense of urgency.
That needs to change. I don’t begrudge Mr. Obama the banquets and the photo ops; they’re part of his job. But behind the scenes he better be warning the Chinese that they’re playing a dangerous game.
Brazil is the world’s tenth largest energy consumer. At the same time, it is an important oil and gas producer in the region and the world’s second largest ethanol fuel producer.
The governmental agencies responsible for energy policy are the Ministry of Mines and Energy (Ministério de Minas e Energia), the National Council for Energy Policy (CNPE), the National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis – ANP), and the National Agency of Electricity (Agência Nacional de Energia Elétrica – ANEEL). State-owned companies Petrobras and Eletrobrás are the major players in Brazil’s energy sector, as well as Latin America’s.
Its energy comes mostly from renewable sources, particularly hydroelectricity and ethanol; and nonrenewable sources, such as oil and natural gas. A global power in agriculture and natural resources, Brazil unleashed the greatest burst of prosperity that it has witnessed in three decades.
The discovery of potentially massive reserves of oil and gas off its coast in 2007 seems set to transform the Brazil’s position as an energy superpower and the government says it plans to join Opec in the near future.
As a result, the Latin American giant appears to be perfectly set up to deal with the energy challenges of the next century.
You can see an interactive map about Brazil’s energy sources here.