BRIC Starts with B

Last week, Daniel Dantas, a Brazilian banker of fantastic wealth and influence, was convicted on corruption charges, sentenced to 10 years in prison, and fined R$ 12 million ($5 million). Mr. Dantas’ fate remains unclear as he may still file multiple appeals that could take years to be evaluated. Nevertheless, his conviction reflects an accomplishment of the Lula administration in Brazil: the freedom of the Polícia Federal, responsible for gathering the evidence in the case. The PF has been allowed to aggressively pursue corruption investigations since 2003 and numerous prosecutions show that Brazil’s institutional modernization process remains strong, despite the chaos in the global economy.

Since Goldman Sachs’s Jim O’Neil started promoting his dream of the BRICs—developing markets in Brazil, Russia, India and China—in 2001, Brazil has often been considered the ugly duckling of the group. Next to a former superpower and two ancient civilizations boasting over one billion citizens, the South American giant may have seemed Lilliputian. But the global economic crisis has made a huge difference. Brazil’s admirable resistance to the current turmoil vindicates its placement. It also strengthens the judgment that the B-side of the BRIC dream is not one of scandalous GDP growth rates, but one of steady 3-7 percent increases per year. Current estimates for 2009 hover around 3 percent, even as economies around the world stagnate or shrink. Yet the government’s more optimistic prediction, of 3.5-4 percent, was reinforced by yesterday’s release of exceptional growth data (6.8 percent for the third quarter of 2008).

So what is the connection between Mr. Dantas’ prosecution and growth expectations for Brazil? The case shows that the country is still on a steady march towards fixing problems common to emerging markets. This march started in 1994 with the Plano Real, the monetary stabilization plan that ended Brazil’s inflation crisis as rates breached 2000 percent annually. Fernando Henrique Cardoso, the Finance Minister responsible for this plan, was elected president twice (1994-2002) and started a new era of commitment to responsible economic policy.

In addition to the well-known reforms in monetary policy, another Cardoso legacy was the restructuring of the Federal Revenue, which helped to ameliorate Brazil’s problem with tax collection. The FR beat collection records in all but the first of the Cardoso years. Just as Cardoso transformed the Federal Revenue, Lula is transforming the Federal Police. Today, the RF is a milestone in efficiency, even if it is still no IRS. The PF may be as successful, even if it falls short of FBI standards.

But the Cardoso years also show us that one cannot modernize the country alone and all at once. The PF was dishearteningly quiet in that period. The Prosecutor General was mockingly dubbed the Archivist General in critical opinion articles, so many were the cases supposedly locked away in drawers. The Dantas case, however, makes it clear that this has changed under Lula. The PF has been more active than ever.

Admittedly, such vigorous activity comes with its negative side. Arrests become spectacles on national television, narrated by reporters on police captains’ speed dials. A general fear of wiretapping, legal and illegal, takes over the political and business classes. Nevertheless, corruption is being attacked day in and day out. The skeptical observer should still praise Lula for letting the PF do its job. After all, investigations have all too often gotten dangerously close to people around the president himself.

Despite this and other shifts, Lula’s government is not antagonistic to the legacy of Cardoso’s stabilization policies. The president and his left wing Workers’ Party chose to uphold the economic orthodoxy of their predecessor. Brazil’s interest rate remains among the highest in the world at 13.75 percent. This demonstrates that the left and the right have actually agreed on a plan for the country. Their issues are different—modernization of the tax system vs. freedom for the federal police, or control of the government budget vs. poverty alleviation. But Brazil has reached a new paradigm in its economic history: One of fixing the country’s problems without compromising macroeconomic stability.

Last April, credit rating agencies recognized this achievement and gave Brazil’s sovereign debt “investment grade” status. But this was a small reward given the shift the country has experienced since 1994. Brazilian government bonds remain too cheap (currently paying over 500 basis points above the 10-Year Treasury). Charging a sky-high political premium to a country that has had a fiscal revolution, and where Daniel Dantas can be arrested through due process of law, seems to be rather exaggerated. The bonds’ inadequate BBB-rating—barely above speculative status — contributes to this mispricing. But, of course, this grade was given by the same agencies that rated several mortgage-backed securities AAA and helped create the current financial maelstrom, which Brazil, fittingly, is sailing through with enviable resilience.

As we approach the fifteenth anniversary of the Plano Real, Brazil’s state of affairs is better than at any other time in its history. Growth prospects are exceptional and the numerous Federal Police operations, and the Dantas sentencing, evidence the reforms that have strengthened the country’s institutions in the past years. The continuation of these reforms will assure Brazil’s long-term growth and its future place among the great economic powers of the world, perhaps along other BRICs. In the meantime, let’s sit back and wait to see who gets arrested next. And don’t forget to buy those bonds.


Flavio S. Campos ’08-’09 is a history concentrator in Eliot House.