In a way, Brazil is a jail. Fortunately, it is a beautiful prison, with glittering beaches, exotic flowers and wonderful food. However, it has 190 million Brazilians locked in a closed economy—forced to accept whatever quality of goods and services, at whatever price and quantity. Despite all of the BRIC hype, Brazil remains one of the most closed economies in the world. Brazil’s exports and imports, as a percentage of GDP, should be 16% in 2010. Argentina’s trade as a percentage of GDP will be more than twice as much, and Chile’s trade will be 56% of GDP. To put things in perspective, Singapore’s is more than 150% of GDP. The country’s closed economy is the reason why Brazilian firms can charge exorbitant prices for basic goods and services. Automobile prices, for example, are multiples of what they are in other countries. Brazil’s cellular services are the second most expensive on the planet, next to South Africa. Air fares are ridiculous, and the cost of consumer credit is among the highest in the world. The lack of competition gives Brazilian producers monopoly-like powers that result in very attractive business models. Just a few nights in Rio confirms this, where the absence of world-class hotels allows local institutions to charge deliriously high rates for lackluster services. While this may be an annoyance for tourists and business travellers, the real victims of the closed economy are the country’s 190 million inmates. They are the ones who have to constantly bear the burden. Yet, one of the beneficial side-effects of the closed economy was the creation of Brazil, Inc.—a commercial and industrial behemoth that allowed it to take on a dominant role on the global stage.
Brazil’s closed economy is no aberration. It is the direct result of a premeditated campaign that started more than five decades ago. World War II was a devastating experience for Brazil. The country’s heavy emphasis on commodity production left it extremely vulnerable when the major industrial powers redirected their output for the production of military equipment. Therefore, Brazil was forced to rapidly industrialize during the 1940’s in order to prevent the collapse of its economy. However, the end of the war brought an onslaught of cheap imports, as the various combatants tried to reclaim their traditional export markets. Vowing never to allow this dependence to repeat, Brazil’s political leadership embarked on a policy of import substitution industrialization. Billions of dollars were poured into the creation of steel mills, engineering facilities and manufacturing plants. At the same time, the government raised import tariffs and did little to improve the country’s ports, airports and highways. Import-substitution peaked during the 1970s, as it tapped the international capital markets to construct huge industrial facilities. Known as the period of the Brazilian Miracle, economic activity soared through a proliferation of automobile plants, textile factories and airplane facilities. The massive capital inflows allowed the currency to appreciate, thus undermining exports. Unfortunately, industrialization further induced Brazil to shift away from its areas of comparative advantage and core competencies. The government began focusing on extravagant projects, such as the creation of a world-class telecommunications industry to take on Alcatel, Siemens and Bell Labs, as well as the formation of a computer industry to compete against IBM and ITT. Brazil’s dreams ended in 1982, when the international capital markets collapsed following Mexico’s default. Over the next two decades, Brazil returned to its areas of comparative advantage—but the spirit of protectionism remained. However, there was a silver lining. Brazil’s corporate sector began using its huge domestic consumer base, over-valued exchange rate and unparalleled access to capital to develop the scale and balance sheet needed to compete on the global stage.
Brazil, Inc. is a force to be reckoned with. Its firms play dominant roles in global industrial sectors, such as mining, beverages, food processing, paper and pulp, petrochemicals, aerospace, air transportation, construction, finance, energy and many more. Brazil, Inc.’s ambitions are limitless. Its corporations are pouring billions of dollars into foreign acquisitions. No longer limited to investments in Peru, Uruguay, Bolivia and Colombia, Brazilian firms are aggressively attacking the U.S., Europe and Africa. However, the fact that many of these firms prefer to invest abroad rather than at home highlights some of the underlying flaws with the country’s economic model. By subconsciously keeping the economy closed, Brasilia is helping to sustain Brazil, Inc. However, it is also condemning large swaths of the population to a life of poverty by giving them no choice but to rely on overly expensive goods and services. Therefore, Brazil is nothing more than a jail, with very rich wardens. Yet, it will need to liberate its inmates if it ever expects to harness its full economic potential.