The Next Brazil?

A lot has been made of the seminal Global Economics paper by a Goldman Sachs research team in which they heralded the dawn of a new era in the global economy and its driving forces. The report: “Dreaming with the BRICs” moved the discussions about the economic power of Brazil, Russia, India and China (BRIC) from the hallowed corridors of global investment houses and Bretton Woods institutions to the dinner tables of every globally aware household. Of this group, China & India have captured the imaginations of many who seek to make fortunes (or a quick buck) and added significant fuel to the fire burning under the policymakers or pessimists worried stiff about the decline of the United States and other G8 countries. Although the Dragon (China) and the Tiger (India) have gotten most of the attention, I seem to be personally most fascinated with “B” in BRIC: Brazil. I think Brazil has undertaken a remarkable journey with the potential to be greater economy, hence it probably represents the best model for developing countries – primarily in Africa – to emulate.

Why my fascination with Brazil? I think its modern economic and political history is much more similar to the rest of the developing world. On the political end: China has been governed in an autocratic fashion by a tight group of unelected “wise old men” since the communist victory of 1949 while India has remained a chaotic, multi-party, parliamentary democracy since its independence from the Brits in 1947. Brazil on the other hand has – like much of the developing world – had its fair share of democratic and not-so democratic civil rule, self interested military juntas and the often benevolent or enlightened military dictatorships. The country seems to have been a large scale experiment for various political and leadership philosophies: for heaven sake they replaced a technocratic, doctorate wielding president (Henrique Cardoso) with a former trade unionists born into poverty with very little formal education who turned out to be an avid free-marketer delivering record economic numbers (President Lula)!.

The country’s recent economic history is no less colourful. Brazil has been transformed from the hyper-inflationary land in which grocery prices changed a couple of times a week – or even in a day, to a country now able to issue long-dated bonds due to much more stable inflation outlooks. It has moved from an era of near habitual bond defaults to being adjudged investment grade by the most powerful folks in the world: the Rating Agencies. The Real has moved from being near worthless due to frequent devaluations to becoming one of the most actively traded currencies in the world.

Which now leads me to the most important question: which country will (or can) be the next Brazil?. One thing is clear in my mind: there will be no “next China” or “next India”, these countries are freaks of nature and cannot be replicated. No other country has got a Billion people and counting in an economy which (in the case of China) is run by a couple of old guys with decades of experience running stuff and who can always take a long term, pragmatic view of policy because they never have to bother with the “minor inconveniences” of elections and opinion polls. So the jury is out for African nations: you can’t be the next India or China, sorry!!. So we are left with the “Next Best Thing”: becoming the Next Brazil. So the question up for debate is what African country has the potential to be the next Brazil?. I would say it is Nigeria, not because I am Nigerian (it obviously helps) but because it is a view supported by serious people like the Development Finance Institutions (DFIs) and leading fund managers with experience in emerging economies. Although I admit that DFIs have a penchant for viewing the world with rose tinted glasses while emerging market fund managers are quick to talk up any country with half decent economic prospects (how else are they going to profitably exit the positions they’ve taken in such countries’ stock and bond markets). This notwithstanding, I believe compelling evidence exists to support the case of Nigeria of POTENTIALLY becoming the “Next Brazil”.

First is population. Brazil’s got about 190 million people while Nigeria’s got about 140-150 Million people which can form the base for potentially lucrative domestic markets. I believe domestic market sizes would become increasingly important for countries – particularly African ones – seeking economic growth. Let’s face it: we are not going to be the world’s workshop as China will have that honour for a while due to very cheap unit labour costs (the consequence of a billion people), low state mandated financing costs and ridiculously low electricity costs fostered by mind boggling hydro projects like the Three Gorges Dam as well as an almost fanatical commitment to cheap coal plants in this environmentally sensitive days. African countries are also not likely to become global hubs for high end manufacturing or products. That crown – in my opinion – will remain with the Europeans (due to excellent craftsmanship honed over centuries) and the Americans (with their world leading research universities). So African countries may have to rely to a greater extent on domestic investment and consumption to a greater extent than the Chinese have done. On this point, Nigeria is the most ideally placed African country to build a vibrant domestic market on the back of a huge population. South Africa – the other big Sub-Saharan African economy – with a population of 45 Million is simply too small to be creditably tipped to be the next Brazil. In fact many analysts expect Nigeria to eclipse South Africa as the biggest African economy within the next decade.

I also believe that going forward in this century, population size will become increasingly correlated to economic power and GDP size. I think its a classic situation of history repeating itself, this time through the impact of technology. For much of human history, human conditions were pretty uniformly grim across much of “the known world”, first through “hunter-gatherer” societies and then through subsistence farming. So it was quite simple, the larger a country or kingdom the larger its economy or GDP. What changed the game was the Renaissance (with the invention of joint stock companies, financial markets etc) and the Industrial Revolution (which ushered in machines, railways and automation). Both of these events led to productivity imbalances and the world was split into the “haves” (countries with the tools of the modern age) and the “have nots” (countries lacking such tools). So we could easily have small countries with the modern tools (industry, transportation, communication etc) having economies many times that of much more populous countries still stuck with near primitive tools, techniques and economic organisation. What has changed in the past couple of decades (and will probably be more pronounced in the future) is that as technology becomes more widely adopted, the productivity gaps among world regions will gradually shrink. Witness the rapid growth in mobile telecoms in Africa, the continent practically skipped the landlines that cost developed economies hundreds of billions of dollars to install over many decades. I expect this scenario to also play it in other areas such as the internet (we are going from having no access at all to adopting broadband and skipping dial-up). In a world that is hopefully more even in terms of productivity, it will be a return to the pre-Renaissance age in which population size largely determined economic size. Nigeria with 150 Million people (40% of whom are teenagers and below) is also better placed than many economies to be one of the next growth engines in the long term.

Second similarity with Brazil is the resource story. While very creditable stories exist chronicling effects of “Dutch disease” and the “resource cause”, Brazil’s recent history suggests that it is indeed possible to utilise bumper profits from as a catalyst for modernising an economy. It is generally accepted that life in the coming century will be a lot more resource constrained than in the 20th century with the attendant rise in the costs of such commodities. Nigeria – like Brazil – is quite resource rich with huge concentrations of Oil and Gas on both onshore and offshore locations. I expect that while Crude Oil has been the mainstay of the Nigerian economy for the past half-century, Natural Gas may turn out to be the growth engine for the future. The country is already ranked 7th worldwide in terms of proven gas reserves. These reserves will be further developed as nations all over the world shift from coal to cleaner burning Natural Gas and the country itself develops the domestic gas gathering infrastructure needed for dragging its citizens from darkness into the marvellous (electric) light. Bitumen is another resource, Nigeria accounts for much of Africa’s bitumen reserves. The massive infrastructure projects in major emerging markets is likely to improve demand for bitumen, lead to higher prices and help further validate the commercial rationale for bitumen mining. In essence, in the resource constrained “new world” in which we live, access to resources will underpin economic growth and on this point Nigeria seems to be a good bet.

….To be continued