A Minute With...

Werner Baer, expert on Latin American industrialization

1/17/2012  8:00 am

Buoyed by a boom in exports to China and India, Brazil recently leapfrogged the United Kingdom to become the world’s sixth-largest economy. Werner Baer is a professor of economics at the University of Illinois who studies the industrialization of Latin America. He spoke with News Bureau Business and Law editor Phil Ciciora about the significance of Brazil’s rising economic power.

What does Brazil’s ascendancy mean for the U.S.?

image of professor werner baerBrazil is probably the second most important country in the Americas for the U.S.; Mexico is perhaps the only other country that might be more important.

From an economic perspective, Brazil is an important trade and investment partner for the U.S. If you look at some of the major firms of the Fortune 500, they all have major subsidiaries in Brazil. But it’s a two-way proposition, and you have to take into account that Brazilians are beginning to invest here in the U.S. Anheuser-Busch and Burger King are now controlled by Brazilians, and Brazilian steel firms have been buying steel firms in the U.S.

Is Brazil’s economic growth sustainable?

People think that Brazil is this giant that’s growing like mad. If you look at the numbers, it’s not all that impressive. Sure, everybody was impressed in 2010 when the Brazilian economy grew by 7.5 percent. But that was one year, and one observation is not a trend. Last year, growth was slightly over 3 percent. So if you really look at the economy, it’s really not that impressive.

If you look at the high growth rates in Asia, these high growth rates are often based on a very small base, and the same thing is true of Brazil and many other Latin American countries. Once you have a big base and the population that is well off, you can’t expect a country to grow at a 7 or 8 percent clip every year – or like China, at more than 10 percent per year.

But what’s interesting about Brazil compared with Mexico is that 80 percent of Mexico’s exports go to the U.S. – it’s almost totally dependent on the U.S. That’s not true of Brazil, which has a much greater geographic diversity in its trade relationships. Less than 20 percent of Brazil’s exports go to the U.S. Some goes to Europe, but a lot goes to Asia, especially the export of minerals and food to China.

What happens if growth slows in China? Will that have an effect on Brazil?

Brazil has been relatively sheltered from the recession because there’s been tremendous demand for its primary exports – iron ore, soybeans and quite a number of other food products. From that perspective, Brazil has not been affected as much by the economic crises of the U.S. and Europe. On the other hand, if China slows down, and the demand for those products slows down, that might affect Brazil.

What headwinds does Brazil face?

Brazil faces a lot of challenges. There are some good things coming along – they’re going to host the World Cup, and then two years later, the Olympics in Rio. That will require Brazil to make huge investments in infrastructure, something in which they seem to be lagging behind. Despite years of good growth, Brazil’s rate of investment in itself has been very low. It has varied between 18 and 20 percent of GDP; by comparison, Asian countries invest 35 to 40 percent of GDP.

Another interesting problem is that interest rates in Brazil have been extremely high – among the highest in the world. These high interest rates have attracted a lot of capital from the U.S. and Europe. As this capital moves in to take advantage of the high interest rates, the demand for the Brazilian currency, the Real, increases substantially. So Brazil has experienced a dramatic appreciation in its currency over the last few years. But as its currency appreciates, that means its exports of manufactured products are going to be less and less competitive, and the import of goods from abroad are going to be cheaper. That doesn’t bode well for the future competitiveness of Brazil’s industries in the world markets.

I don’t want to be too critical of Brazil because I think they’ve made tremendous progress. They have many forward-looking economic policies. Inflation was up a bit last year, but the financial situation has been very stable.

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