BRAZIL Global governanceThe world order must changein line with reality,says Celso Amorim,foreign ministerPage 4FINANCIAL TIMES SPECIAL REPORT | Monday November 15 2010

www.ft.com/brazil­2010 | twitter.com/ftreports

Much still to do for the president­elect

Continuity is the word inBrazil. So much so, thatsome Brazilians areunderstandably con-

fused whether Luiz Inácio Lulada Silva, who was constitution-ally barred from running for athird consecutive term in Octo-ber’s presidential election, reallywill be stepping down at the endof the year.

“The king is dead, long livethe king,” Mr Lula da Silva saidat his first joint press confer-ence with president-elect DilmaRousseff. “Continuity lies in pol-icies, not in the people,” headded to emphasise the point.

Ms Rousseff won the October31 run-off against the more cen-trist José Serra with a com-manding 56 per cent of the vote.

But nobody doubts it was MrLula da Silva who transformedhis former chief of staff from alittle known bureaucrat with noexperience as an elected politi-cian into Brazil’s first femaleleader. Some in the country’spoorer north-eastern states evenvoted for her in the mistakenbelief that while they could notelect Mr Lula da Silva at leastthey could vote for his wife.

Ms Rousseff, a 62 year oldformer leftwing guerrilla, facessome monumental tasks that MrLula da Silva left unfinished –not least turning the countryinto the developed nation that itenvisions becoming. And thenthere is the challenge of how tostop her mentor’s popularityovershadowing her.

During her campaign, MsRousseff pledged to stick to themix of orthodox economic poli-cies combined with large dosesof social spending that helpedlift more than 30m people intothe ranks of the middle classover the past five years – andmade Mr Lula da Silva the coun-

try’s most popular presidentever.

On the stump, her speecheswere often wooden, and in TVdebates she often came acrossas tetchy and bad-tempered.

But since winning, Ms Rouss-eff has shown signs of a goodhumoured poise and naturalauthority. A trained economist,with a fondness for state-ledindustrial policy, she has alsomoved quickly to assuage theworries of those that have thebiggest doubts about her – SãoPaulo’s business community.

Top of their concerns is thepublic purse. Despite strong taxreceipts, the government willonly balance its books this yearthanks to some creativeaccounting – booking as reve-nue, for example, the sale of oilrights to state-controlled Petro-bras in the company’s $67bnOctober share issue.

To reassure markets, MsRousseff has promised to main-tain the macroeconomic stabil-ity that has made the boom pos-sible and rein in governmentspending, currently growing at18 per cent a year.

However, she has also playedto her Workers Party’s (PT) sup-porters – labour unions andpeasant movements – sayingthere is plenty of land to distrib-ute and that she is studyingways to raise minimum wagesby almost 20 per cent next year.

Her scanty public recordmeans extra scrutiny is beingpaid to who will lead her cabi-net.

Investors have clamoured fora senior post for Antonio Pal-occi, an important figure in hercampaign and transition team,and a respected former financeminister. They also hope shewill persuade HenriqueMeirelles, the hawkish governorof the central bank, to stay on.

So far, other than displaying astrong belief in her own abilityas a micro-manager, Ms Rouss-eff has given little away. “I’mthe one responsible here,” shetold one television interviewer.“And I can assure that whoeveris in these posts, I will be theone who guarantees the coun-try’s economic stability.”

It was Mr Lula da Silva whointroduced Ms Rousseff to Bra-zil, and it was he, too, whobrought her out to the rest ofthe world at the G20 summit inSouth Korea last week. None-theless, Brazil’s internationalprofile may decline under MsRousseff as the country stepsoutside the circle of light of MrLula da Silva’s charm.

“Without the drive of Lula’sinternational popularity, it isreasonable to expect some defla-tion of [Brazil’s] assertive rheto-ric and its repercussions,” saysBrookings scholar MauricioCárdenas.

Nonetheless, before they leftfor Seoul, protégé and mentorshowed some of the forcefulnessBrazil is becoming known for,as its feels its way towards

John Paul Rathbonesays one of DilmaRousseff’s biggesttasks is to turn thecountry into adeveloped nation

Moving to the driving seat: Dilma Rousseff on her way to give interviews after winning the October 31 presidential election Corbis

Inside this issue

Economy John PaulRathbone notes that stability isnot the same as sustainablegrowth Page 2

Multinationals Growingabroad has become essentialto corporate strategy. JonathanWheatley reports Page 3

On FT.COMAdvertising Foreign agencieshave become eager toestablish a presence, writesVincent Bevins

Electricity Plans to beef upEletrobrás give cause forconcern, says Alastair Stewart

Pharmaceuticals AndrewJack inside the ButantanInstitute, the world’s largestproducer of snake antivenom

Continued on Page 2

2 ★ FINANCIAL TIMES MONDAY NOVEMBER 15 2010

Brazil

Much stillto do forpresidentelect

superpower status, criticisingthe US and China (albeit, notvery aggressively) for keepingtheir currencies artificiallydepressed in the so-called “cur-rency wars”.

“We will fight for Brazil’sinterests on the currency front.They’ll have to face two of usthis time.” Mr Lula da Silvasaid. “The last time there was aseries of competitive devalua-tions, it ended in the secondworld war,” added Ms Rousseff.

The issue is particularlyimportant, given that the trade-weighted real, has risen 33 percent since the start of 2009.

This has helped keep inflationin check, and boosted consump-tion and imports. But it has alsodepressed manufactured exports– prompting fears the countrymight be “de-industrialising”.

The finance ministry hasintroduced a 6 per cent tax onbond inflows to try to curb thereal’s rise. But few believe suchmeasures will have lastingeffect. Economists say that tocurb capital inflows, the eco-nomic policy mix – loose fiscalpolicy combined with tight mon-etary policy – should be theother way around. After strip-ping out inflation, interest ratesare the highest in the G20.

Brazil’s low savings rate alsomakes the country dependenton international capital flows.Of the almost $100bn of capitalinflows this year, only $13bnderived from bond portfolio buy-ing, notes HSBC.

Government spending cutswould boost national savings,reduce interest rates and slowcapital inflows. But, eventhough Ms Rousseff’s coalitionenjoys a majority in both theLower House and the Senate –something Mr Lula da Silvanever enjoyed during his twofour-year terms – spending cutsmay be politically difficult.

The president-elect hasalready ruled out big fiscalreforms – such as tackling thebloated public sector pensionscheme. She has also refused tomodify some of the world’s mostrestrictive labour laws, as thiswould alienate one of her keyconstituencies, the unions.

Ms Rousseff proved her abili-ties while serving as Mr Lula daSilva’s chief of staff – and thereis no shortage of initiatives thatneed better management.

These include a drive toimprove infrastructure under ahuge government-led spendingprogramme, readying the coun-try for the 2014 football WorldCup and 2016 Olympics, simpli-fying the Byzantine tax system,and improving its woeful stateschools.

But Ms Rousseff’s ability tomanage domestic politics suc-cessfully so as to effect thesechanges remains to be seen. Shehas limited support among herown party, which she joinedonly 10 years ago.

There is also the task of man-aging the government’s coali-tion partner, the PMDB, a col-lection of regional baronsknown for their fondness ofpork-barrel politics.

Ms Rousseff has said she will“frequently knock” on Mr Lulada Silva’s door for advice, andhe has hinted he will play anactive part in her government.That, in turn, raises anotheruncertainty: his future role.

Might he, for example, wantto run for presidency again in2014 – making her a caretakerover the next four years? Whenthis was put to her, Ms Rousseffsmiled and said: “I don’t put thecart in front of the horse”.

Continued from Page 1

ContributorsJohn Paul RathboneLatin America Editor

Jonathan WheatleyBrazil Correspondent

Richard LapperBrazil Confidential Editor

Andrew JackPharmaceuticals Correspondent

Louis Amis,Vincent Bevins,Andrew Downie,Dom Phillips,Alastair Stewart,Amy StillmanFT Contributors

Ursula MiltonProduction Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details, contact:John Moncure on:+1 212 641 6362fax: +1 212 641 6544e­mail: john.moncure@ft.comor your usual representative

Banks prosper from sharp rise in consumption

There is cash in chaos. Or thatis what Banco Santander thinks.

The Spanish banking groupthis year opened a branch in aRio de Janeiro favela, or shantytown.

Attracted by a general rise inliving standards and the realisa-tion that more and more peopleare joining the formal economy,it has opened a small branch inthe Complexo do Alemão, one ofRio’s poorest and most violentcommunities.

“Many people here have neverhad a bank account before,”says Guilherme Nycholas, the

bank’s manager. Known fordrug-related violence, the Com-plexo do Alemão is an unlikelyplace to start. But Santanderwas clever enough to realisesuch ventures are betterattempted with local partners.

The branch is identical to its13,000 others around the worldand is on land owned byAfroReggae, a well-known andhighly-respected charity thataims to persuade kids awayfrom gangs through music.

This is only one of the morevisible signs of the extension ofcredit and the banking systemto large new segments of thepopulation. An economic boomand currency stability have ledto an explosion in credit-fuelledconsumption, though credit-to-GDP ratios are still low com-pared with equivalent countries,such as Chile.

High interest rates also meanthat more lending is helpingbanks turn a tidy profit.

Since Luiz Inácio Lula da

Silva took office as president in2003, some 24m Brazilians haveescaped absolute poverty and31m have progressed to the mid-dle class, according to govern-ment figures. But until recently,unpredictable and sometimesvery high levels of inflationmeant it was often impossibleand ill-advised for the lower-middle classes to access credit.

That has changed. Over thepast five years, the amount ofcredit extended to individualshas doubled as a share of GDP.

The residents of the infamousComplexo do Alemão favela donot need to look far to findcredit. It is extremely commonwhen buying household appli-ances, computers, or other rela-tively expensive items to pay ininstalments: a refrigerator, forexample, could be paid for in 18monthly parcels of R$100 ($60).

A bank will be a counterpartyto the transaction, and interestrates – some of the highest inthe world – will be built into the

price, whether or not this isclear to the consumer. Often, toconceal this, the “up front”price is identical to the value ofthe total instalment plan.

Direct consumer instalmentplans have been one of threemain components of the recentexpansion of consumer credit.The other two have been lines

extended by banks based onpayroll guarantees and the pro-liferation of credit cards.

Analysed, the mark-ups canappear brutal. People often endup paying more in interest thanthey do for the products. It isunsurprising, then, that Brazil-ian banks are some of the mostprofitable in the world. But

many consumers are used to thehigh rates and are eager to getaccess to products that werepreviously out of their reach.

“Until recently, I could neverhave bought a car,” says Mari-ele Petriconi, a housewife. “Butnow I have. I can trust that theprices on my two-year paymentplan won’t change, and that wecan make them.”

“The market for individualcredit is growing rapidly,” saysWalter Malieni Júnior, creditdirector at Banco do Brasil. “Wehave 14m new jobs this year,and people are more confidentin their wages and in their abil-ity to take out consumer credit.As a result, loan terms are get-ting longer and rates are comingdown. We expect this to con-tinue into next year.”

State-owned Banco do Brasilwas nudged by the governmentlast year into expanding creditfor consumers in what somesaw as a kind of post-crisis eco-nomic stimulus measure. The

strategy paid off, and the bankreported the largest profits forany bank in Brazilian history.

Other banks are also gettingin on the action.

“All the banks in Brazil havein their strategy to providecredit to the affluent new con-sumer base,” says Marcelo Gilde Souza, global head of Accen-ture’s Corporate Strategy andGrowth Strategy Groups, basedin São Paulo.

He adds: “One type of creditthat is growing rapidly, but stillfrom a very small base, is homemortgages. In the next years,that’s where we will see the bestmovement in Brazil.”

Mr Malieni agrees: “Realestate credit corresponds to just3 per cent of GDP in Brazil. Thetotal credit-to-GDP ratio isabout 45 per cent.” In nearbyChile, which is more developed,the figure is 80 per cent. If thatgap is to close – it will probablybe because of growth in themortgage market.

Consumer creditVincent Bevins andAndrew Downie saypaying for goods ininstalments is awidespread practice

A one­stopshop for foodand industrialcommodities

When Charles Tang set up theBrazil-China chamber of tradeand industry in 1986, he remem-bers, “nobody was interested”.

“Brazil was a closed economyand China was very poor.”Things have changed. “Now,”he says, “everybody wants toknow.”

Since the turn of the decade,exports to China have increased18-fold. The Asian giant nowbuys more than 12 per cent ofBrazil’s exports and in 2009overtook the US to become itsbiggest single market.

Chinese investment in Brazilis growing even more quickly.

According to Mr Tang, ittotalled just $396m to the end oflast year.

So far this year, he says, it ismore than $27bn, includingSinopec’s $7bn purchase of 40per cent of Spanish-owned Rep-sol Brasil.

The deal is emblematic ofwhat lies behind the surge inChina’s interest. As Beijingscours the world for sources ofthe industrial and food commod-ities essential to feed its rapidgrowth, Brazil offers somethingof a one-stop shop.

It is the world’s biggestexporter of iron ore and of ahost of agricultural products,including coffee, sugar and – ofspecial interest to China – the“soya complex” of beans, oil andmeal.

It is also set to become a bigexporter of petroleum. By someestimates, recently-discovereddeepwater oilfields put itsreserves on a par with Kuwaitand Russia.

But in spite of the recent risein bilateral trade and invest-ment, China is still a long wayfrom fulfilling its potential as adriver of Brazilian growth.

As Sebastian Briozzo and Joy-deep Mukherji of Standard &Poor’s, a credit-rating agency,point out in a paper publishedthis month*, Brazil remains arelatively closed economy, withexports equal to only a littlemore than 10 per cent of grossdomestic product.

Even the very fast recentgrowth of exports to China hashad little impact on GDP growth– in fact, the authors point out,quite the opposite:

“In China . . . net exports stillcontribute significantly to GDPgrowth. Conversely, in Brazil,net exports only made a positivecontribution to GDP until 2004.After that, investment growth(and its corresponding impacton imports) diminished theimportance of the external sec-tor. Net exports have actuallyhad a negative contribution toGDP growth ever since.”

Nevertheless, they say, tradewith China has been extremelyimportant for some sectors,including iron ore and soya pro-ducers.

But this too, has its downside.Between 2002 and 2009,manufactured goods fell from55 per cent to 44 per cent ofBrazil’s total exports, while pri-mary and semi-manufacturedgoods grew from 43 to 54 percent.

Many commentators fear that

rising commodity prices and thesteady strengthening of the realare eroding the competitivenessof Brazilian industry and itsmanufacturing base risks beingreplaced by low value-addedcommodity production.

Mr Tang at the China-Brazilchamber says Brazil faces achoice.

“The country has to decidewhat it wants to be, which isprecisely the question that didnot emerge during the electioncampaign,” he says.

“Either it can be a high-cost,non-competitive country, inwhich case it can still be suc-cessful as a commodityexporter.

“Or it can lower the custoBrasil [the term for the extra itcosts to do business in the coun-try – the structural issues thaterode competitiveness] to stimu-late industrial production basedon lower costs.

“And this has nothing to dowith the Chinese.”

Yet rather than consideringfar-reaching reforms to cut pub-lic spending and allow interestrates to fall, or addressing othercomplex fiscal issues, such aspublic sector pensions, theincoming administration seemslikely to be content with trim-ming public spending.

This will leave it with littleoption in tackling the strength-ening real than to turn to cur-

rency controls. In the global“currency war” between the bigeconomies, Brazil has tended toalign itself with China in criti-cising the US’s expansionistmonetary policies, and hasavoided frequent public criti-cism of Beijing.

“This has more to do with pol-itics than foreign exchange,”says Rubens Barbosa, a formerBrazilian ambassador to Londonand Washington. “Brazil is mov-ing closer to China than to theUS and Europe.”

Investing political capital inChina at the expense of tradi-tional partners has its risks. Forone, Brazil is likely to run agrowing trade deficit withChina.

But as the Standard & Poor’spaper notes: “The economic ben-efits of Brazil’s and China’strade relationship remain high.Brazilian exports do not com-pete with Chinese exports inmany markets . . . Increasingexports to China could continueto provide additional resourcesto Brazil, helping ease bothexternal and fiscal constraints.”

How Brazil balances its rela-tionship with China, the US andEurope will be one of the big-gest challenges for the incominggovernment.

*How Important is Trade WithChina to Brazil’s Economy?

China and BrazilBalancing relationswith the east and thewest will be a bigchallenge, notesJonathan Wheatley

‘Brazil has to decidewhat it wants to be:a high­cost countryor it can lower thecusto Brasil’

Charles Tang, Chairman,Brazil­China Chamber of

Commerce & Industry

Stability is not the sameas durable growth

The economist, a regularcolumnist at a leadingnewspaper, looks out ofthe window at São

Paulo’s sparkling nightscape –but expresses only scorn.

The view from his 18th floorapartment encompasses thebusiness district, the skyscrap-ers on Paulista Avenue, theroads thick with commuter traf-fic, plush shop fronts on thestreet below, and city lights thatstretch as far as the horizon,hinting at the surrounding vast-ness of the country.

“All this,” the economist says,pointing at the urban expanse,just a fraction of São Paulostate, which has an annual eco-nomic output twice that ofGreece, “it’s just home to Bra-zil’s top 1 per cent, no more. Themillions, the other 99 per cent,live beyond. The idea that Brazilhas somehow made it? Non-sense.”

It is only an anecdote. None-theless, it captures the bemuse-ment some feel about how thecountry has recently become aninternational investor “darling”.For the first time in living mem-ory, it seems, foreigners aremore bullish about Brazil thanare Brazilians.

This is due to the great strides

the country has made over thepast 16 years under outgoingpresident Luiz Inácio Lula daSilva and his predecessor, Fern-ando Henrique Cardoso.

The country built a reputationfor macroeconomic stability.Combined with the Asian-drivencommodity boom, this deliveredeconomic growth and risingincomes.

Reforms enacted in past crisesalso immunised the financialsector: there were no big bankfailures during the global finan-cial crisis.

Meanwhile, record levels ofjob creation created a feelgoodfactor.

But stability and feeling goodare not enough – as Mr Cardosohas put it, they risk “anaesthe-tising” the country.

For one, stability is not thesame as durable growth – espe-cially when much of it is basedon a consumption boom, inwhich bank lending is growingat a 20 per cent annual clip.

Nor should continuing stabil-ity be taken for granted. AsGuido Mantega, the outgoingfinance minister has said, thecountry faces a global “currencywar”. Indeed, it is already suf-fering early wounds.

Capital inflows, funded atnear zero per cent internation-ally and drawn to Brazil byinterest rates some 10 percent-age points higher, have pushedup the trade-weighted exchangerate by over 35 per cent sinceJanuary 2009.

In addition, nominal wageshave soared by more than halfbetween 2003 and 2009, accord-ing to the InterAmerican Devel-opment Bank. This hasincreased local costs further.

A meal in São Paulo or Rio deJaneiro, for example, now coststhe same as comparable restau-rants in London or New York.

Rising local costs have alsohurt export competitiveness.Exports have risen by 40 percent over the past five years, forexample, but imports havealmost doubled.

One result of this consump-tion boom is a steadily wideningcurrent account deficit, forecastto reach about $60bn this year,or 3 per cent of gross domesticproduct.

Only about half of that is cov-ered by direct investment. Muchof the rest is funded by the “hotmoney” that Brazil, ironically,now seeks to discourage via a6 per cent tax on bond portfolioinflows.

The paradox points to amacroeconomic weak spot.

On the one hand, the countryneeds foreign savings. In 2008,according to the World Bank,Brazil saved a mere 17 per centof GDP, against 38 per cent inIndia, and 54 per cent in China.

At the same time, it needs toboost investment – both tomaintain growth and to buildthe new roads and better portsthat will help companies

become more competitive andso vault the strengtheningexchange rate.

Yet, historically, Brazil hasinvested only about 15 per centof GDP a year.

To reach the 25 per cent levelof most emerging economieswould require another 10 per-centage points of GDP – some$200bn a year, notes Neil Shear-ing, an analyst at Capital Eco-nomics, the consultancy.

As this funding would comefrom abroad, however, thatimplies even more capitalinflows.

The country is not in any dan-ger, yet. But “Brazil has to takecare not become complacent,”says Armínio Fraga, a formercentral bank governor.

The surest solution would beto cut government spending,currently growing at 18 per centa year.

This would free more cash fornational savings, lower localinterest rates and curb capitalinflows. It would also cool aneconomy that is growing at 7per cent – almost twice its 4 percent sustainable rate.

Slowing government spending“would pay huge dividends,”adds Mr Fraga.

Put more starkly, Brazil facesa choice about the kind of econ-omy it wants to be, says CharlesTang of the Brazil-China cham-ber of trade and industry.

“It has to decide if it wants tokeep its high cost model, inwhich case it can’t even thinkabout having an internationallycompetitive manufacturingindustry.”

It is perhaps the biggest deci-sion that Ms Rousseff, a trainedeconomist, will have to make.

EconomicsWith bank lendinggrowing at 20 per centa year, a consumptionboom is cause forconcern. John PaulRathbone reports

‘If [Brazil] wants tokeep its high costmodel . . . it can’t thinkabout having acompetitivemanufacturingindustry’

Edible wealth: demand for commodities such as soya, from China in particular has delivered economic growth and rising incomes Corbis

‘One type of creditthat is growing rapidly,but from a small base,is home mortgages’

FINANCIAL TIMES MONDAY NOVEMBER 15 2010 ★ 3

Brazil

Companiesmustexpand toprosper

Vale, the world’s big-gest producer of ironore, is also theworld’s second-

biggest mining company. Itstarget is to be the biggest.

AB InBev, the world’s big-gest brewer, was created andis run by Brazilians. JBS-Friboi, which started life as atiny slaughterhouse, hasgrown to become the world’sbiggest processor of animalprotein, with operations onall five continents.

For companies with globalambitions, even the size anddynamism of Brazil’s fast-growing consumer marketare not enough. Yet marketdomination on a global scaleis far from the only reasonfor expansion abroad.

After hovering around zerountil the early years of thisdecade, overseas investmentby Brazilian companiesjumped to nearly $30bn in2006 and was about $20bn in2008, before the global finan-cial crisis forced a severeretrenchment – so severethat, overall, national compa-nies brought back about$10bn from overseas opera-tions.

But in spite of the slowergrowth now expected inmany companies’ foreignmarkets, outward invest-ment is continuing and sev-eral Brazilian transnational

companies expanded theirforeign operations last year.For many, growing outsidetheir home country hasbecome an essential part oftheir business strategy.

Sabó, a Brazilian autoparts maker, was quoted assaying in a recent report:“Going international is amatter of survival and com-petitiveness, not only in theautomotive industry, butalso in the globalised world.”

The report, on Braziliantransnational companies wasprepared by Sherban Leon-ardo Cretiou and colleaguesat the Fundação Dom Cabral,a business school.

Mr Cretiou says theadvance of globalisationmeans that many Braziliancompanies that are big intheir home market havefound themselves competingwith foreign companies that,on a global scale, are muchbigger.

“If you want to avoid inter-nationalisation from the out-side, expanding overseas canbe your only defence againstbeing acquired by foreigncompetitors,” he says. “Thatgives you the muscle to con-tinue to compete.”

Globalisation has alsoexposed competitive disad-vantages in Brazil, includingits complicated and oneroustax system, costly labourlaws and inadequate infra-structure – all exacerbated inrecent years by the steadystrengthening of its cur-rency, the real. This hasforced changes in companybusiness models.

Marco Polo, for example, abusmaker with a long his-tory of foreign operations,has traditionally sent parts

abroad for assembly. Increas-ingly, it is doing more localpurchasing and manufactur-ing at its foreign operationsbecause exporting from Bra-zil has become less competi-tive.

Other companies havegone abroad in search of newtechnology.

For Gerdau, a steelmakerwith about half its sales andassets outside the country,learning about new proc-esses and diversifying prod-uct lines was one of the maindrivers behind its acquisi-

tions in the US and Canada.Several companies have

expanded overseas to followtheir customers, be theyother Brazilian companies orforeign multinationals.

Service companies such asTotvs, which supplies busi-ness software, have nochoice but to establish for-eign operations if they wantto service customers abroad.

While many companiestake their first steps abroadby opening a sales office,true expansion for mostmeans taking the plunge into

mergers and acquisitions.This can be far from easy –

as Vale found when itbought Inco of Canada and aclash of business andnational cultures resulted instrained relations betweenmanagers and a lengthystrike by workers.

Sérgio Citeroni, a partnerat Ernst & Young Terco inSão Paulo, says such clashesconstitute one of the biggestthreats to the success of for-eign expansion.

“Culture shocks, powerstruggles, questions of gov-ernance, all these provoke aloss of focus and stability,and in a very competitiveenvironment you can’t affordthe luxury of wasting timeover internal disputes,” hesays.

Going international, headds, often means makingcommitments to foreign reg-ulators that Brazilian compa-nies are not used to. “Thiscan be a big obstacle.”

But Brazilian regulationsalso play a part in overseasexpansion.

Antitrust bodies havebecome much less tolerant of

monopolies and oligarchiesin recent years, meaningthat many large companieshave run out of room toexpand at home and mustpursue growth overseasinstead.

Some companies have beenhelped in gaining scale andtherefore competitivenessthrough natural advantages,such as the country’s min-eral and other naturalresources, including itsexcellent climate and abun-dant farmland. Vale, JBS andGerdau all come to mind.

But Mr Cretiou says few, ifany, would have succeededabroad if they did not alsohave good managementcapable of taking decisionsquickly. He says Odebrecht,a construction company,offers a good example of astrategy that sets rigidparameters but also allowslocal managers great free-dom in applying them.

In spite of last year’sretrenchment, he says, Bra-zilian companies are ready toresume their overseasadvance next year.

“We have seen some for-eign acquisitions this yearand my guess is that we willsee a lot more in next year’sreport,” he says.

GlobalisationJonathan Wheatleysays growing abroadhas become anessential part ofcorporate strategy

Foreign policy Big ambitionsForeign policy has acquired a new importance inBrazilian political life. This is not just because ofoutgoing president Luiz Inácio Lula da Silva’soccasionally controversial foreign policy initiatives,such as when he tried to broker a nuclearagreement with Iran this year, or embracedpresident Raúl Castro on the same day a Cubandissident died on hunger strike, writes John PaulRathbone.

For some, such events marked a worrying shift inBrazil’s traditional approach to foreign affairs, whichhad previously been marked by the skilled attentionof its diplomatic corps to narrower issues, such astrade.

For others, including Mario Vargas Llosa, aPeruvian novelist, it was also morally abhorrent.“Lula is a democrat, and then he goes and hugs arepellent dictator like Mr Castro . . . It bothered me,it saddened me, I felt indignant,” commented MrVargas Llosa, shortly after receiving the Nobel Prizefor Literature this year.

Be that as it may, Brazil’s political stability, fast­growing economy, Bric and G20 status, and sheersize (the world’s fifth biggest nation and alreadyeighth biggest economy) ensure it will play anincreasingly important role in world affairs –whoever is president.

For example, in a September Pew Research poll,24 per cent of Brazilians believed their country wasalready a superpower and 53 per cent that it wouldsoon become one.

As Marco Aurélio Garcia, the éminence grise ofBrazilian foreign policy and Mr Lula da Silva’s pointman on Latin America, puts it: “Foreign policyshouldn’t be understood as way of projectingBrazil’s presence on the world but rather as asubstantial part of Brazil’s national project.”

By that Mr Garcia, who played a big role inmanaging president­elect Dilma Rousseff’s electoralcampaign, means Brazil no longer thinks of itself asapart from the world – or even the region.

Instead, commensurate with growing confidenceat home, it believes in multilateralism, the rise ofthe south, regional integration, and furthering thecountry’s financial and corporate reach.

All this suggests that foreign policy will be noless ambitious under Ms Rousseff, who formallybecomes president on January 1 – although it maybe less aggressive.

“Without the drive of Lula’s internationalpopularity, it is reasonable to expect some deflationof the assertive rhetoric and its repercussions,”suggests Brookings scholar Mauricio Cárdenas.Instead, Ms Rousseff’s main challenge, after findingher feet at home, will be to find a balance between

“a less flamboyant andideologically driven

foreign policy,without seemingto be lessambitious”.

Marco AurélioGarcia: formultilateralismand regionalintegration

1

2

3

4

5

6

7

8

9

10

JBS-Friboi

Gerdau

Ibope

Metalfrio

Odebrecht

Marfrig

Vale

Sabó

Tigre

Suzano Papel e Celulose

Top 10: Brazilian companies’ international reach

Source: Fundação Dom Cabral

Food

Steel and metal

Research

Metal-mech

Construction

Food

Mining

Autoparts

Building materials

Pulp and paper

84

48

32

37

46

52

33

34

20

70

37

54

51

41

20

23

46

19

43

9

64

46

54

54

49

35

24

34

23

4

Company Primary industry Sales AssetsEmployees

% abroad

Gerdau, a steelmaker, hasabout half its sales and assetsoutside the country Bloomberg

4 ★ FINANCIAL TIMES MONDAY NOVEMBER 15 2010

Brazil

Caution and tough regulation are all­weather assets

When Guido Mantega, thefinance minister, coined thephrase “currency war” andattempted to stem the tideof capital flowing into Bra-zil, he was responding tosome unexpected conse-quences of his country’ssuccesses.

Not that long ago, it wasa much less popular desti-nation for capital.

But Brazil has conqueredrunaway inflation, is grow-ing quickly, and has someof the most sophisticatedand well-regulated capitalmarkets in the developing

world, especially for equity.The BM&FBovespa, the

country’s multi-assetexchange based in SãoPaulo, is now the second-largest in the world basedon asset value, and isincreasingly becoming aregional hub.

Luiz Muniz, head ofinvestment banking for Bra-zil and Latin America atRothschild, says: “Capitalmarkets are quite devel-oped. For example, the list-ing segmentation createdby the BM&FBovespa onthe basis of levels of corpo-rate governance standardsis remarkable.”

The segmentation,referred to as the novo mer-cado, groups companies onthe Bovespa by the level ofcorporate governance theyhave adopted.

Companies can choose toagree to rigorous corporategovernance rules, or to signup to less stringent regula-

tions and list on ‘level 1’ or‘level 2’. Or they can simplystick to the basic require-ments of Brazilian law.

These structures, intro-duced in 2001, cleverlydeployed market forces tobring companies in linewith internationally recog-nised standards, and thedearth of listings and IPOsat the start of the decadeturned into a steady stream,that continued eventhrough the crisis of 2008-2009.

As interest rates nose-dived in the developedworld, Brazil became moreattractive. Since March2009, the Ibovespa, the mainstock index, has risen bymore than 170 per cent indollar terms.

According to theexchange, the majority ofits market capitalisation,trading volume, and shareissuance now involves com-panies adhering to the high-

est level of corporate gov-ernance standards. Onenotable exception is Petro-bras, and its recent record-breaking $70bn share issue.The national oil companymakes no claims about novomercado standards ofbehaviour.

“The rules and optionsare clear with segmenta-tion. Issuers know whatthey should provide interms of disclosure, eco-nomic and governancerights, and investors knowwhat to expect whenthey’re buying novo mer-cado, level 1, 2, or tradition-al-segment stocks,” MrMuniz says. “Issuers andinvestors should not beforced in either direction.Our listing segmentationlets the markets price eachcategory and decide whatsegment will prevail.”

The BM&FBovespa’sgrowth has recently beenaided by enthusiastic adop-

tion of the newest tradingtechnologies. There are nowfacilities for co-location, animportant tool for the high-frequency trading it pro-motes and for which offersdiscounts.

“High-frequency tradingnow accounts for about 5per cent of volume,” says

Cicero Vieira, chief operat-ing officer. “I think that ifwe reach 15 per cent in oneor two years, that would begood for the market.”

The discounts also makeit easier to track high-frequency traders, one of afew precautionary measures

to alleviate concerns thatarose about the practiceafter the May 6 “flashcrash” in the US.

Caution and strict ruleshave become some of thehallmarks of equity mar-kets in a country thatlearnt hard lessons from ahistory of financial crisesand instability. This was anasset during 2008-2009, andBrazilian markets remainedstable.

Among other rules, theexchange itself acts as acounterparty in all tradesand requires detailed infor-mation on each one.

For the corporate debtmarket, the combination ofhigh interest rates and fastgrowth delivers a mixedbag. Large companies issuedebt abroad, where highyields – often more than 5and 6 per cent for 10- and30-year bonds – and a rela-tively low risk profile gen-erate lots of interest.

Locally, though, marketsare underdeveloped, andsmall and medium-sizedcompanies struggle. Thoughmost analysts think thatinterest rates will comedown in the long term, atthe moment they give riseto low leverage levels andshort maturities for bonds.

“The local corporate mar-ket is a bit more short-dated[than abroad], and usuallygoes up to six years maxi-mum,” says AlexandreAoude, global head of fixedincome at Itaú BBA, thewholesale and investmentbanking unit of Itaú-Uni-banco. But there is everyreason to believe that his-tory is on the side of Bra-zil`s debt markets, he says.

“The current environ-ment is so positive in termsof growth, and with newcompanies coming in thenext year, that the marketmight start shifting to lowinvestment grade compa-

nies in the local market. Wemight start seeing morehigh yields locally. We’regoing to follow the path ofdeveloped markets.”

But the BM&FBovespa isnot waiting for anything.Officials are embarking ona three-pronged strategy togrow quickly.

The first is technologicalupdating.

The second is internation-alisation. Through thelaunch of BDRs (BrazilianDepository Receipts, Bra-zil’s answer to ADRs in theUS) and a project withChi-X, the trading platform,investors worldwide will beincreasingly able to buyBrazilian stocks in theirown currencies.

The idea is go to afterindividual investors in theUS, Europe and Japan whomight have heard aboutopportunities in Brazil.

The third goal is to enticeBrazilians to invest.

Capital marketsThe São Pauloexchange is nowthe second largestin the world byasset value, saysVincent Bevins

The exchangeacts as acounterparty in alltrades and requiresdetails on each one

Governancemust reflectglobal reality

A profound adjustment isneeded in worldgovernance.

We seem to be stuckwith structures similar tothose of vast empires ofthe past, where decisionsare taken behind closeddoors by a handful ofactors, regardless of whatwider society has become.

An article published thisyear by the FinancialTimes showed that theBric countries will accountfor more than 60 per centof the world’s growth from2008 to 2014.

Emerging and developingeconomies will create asignificantly larger shareof global growth. Brazilitself is poised to becomethe fifth-largest economyby the end of the decade.

A new group of countrieshas surely earned growinginfluence on core issues onthe international agenda,from climate change totrade, from finance topeace and security.

They bring freshperspectives and contributeto a new, fairerinternational balance.

Yet their ability toexpress legitimateinterests, is constrained byglobal governancestructures that are nolonger representative.

In a domestic context,such a situation might leadto revolution; in a worldwith obsolete institutions,it is leading to collateralalliances.

Greater co-ordination inthe WTO, the IMF, the UN,as well as new coalitions,such as the Bric, haveallowed developingcountries to raise theirprofile.

The Bric grouping hasevolved to an effectiveforum for discussion andco-ordination ofinternational issues,especially those related tothe economy.

Two summits havealready been held, the firstin Ekaterinburg, thesecond in Brasília. Thethird is scheduled for 2011in China, but before thatthe leaders will meet inSeoul at the margins of theG20.

Although there aredifferences betweenmembers, there is a sharedview of the need toimprove global governance.

Regional and inter-regional co-ordinationamong emerging anddeveloping countries isexpanding rapidly inAfrica, Asia and LatinAmerica and theCaribbean.

Trade and investmentpatterns have changed toreflect this. So much so,that the definition ofperipheral countries has tobe continuously reassessed.

Overall these trendsrepresent a welcomeevolution, generating morebalance. It was theperception of such ascenario several years ago,that prompted Braziliandiplomacy to adjust itscourse.

The more developingcountries discuss and

co-operate, the more theirvoices will be heard.

The memory of a sidemeeting during the WTOMinisterial in Hong Kong,in 2005, is still vivid forme. We had decided tosummon a gathering ofdeveloping nations todiscuss – and protestagainst – the subsidiespaid by rich countries totheir agriculture, to thedetriment of poor farmersaround the world, inparticular cotton growersin Africa.

Quite unexpectedly, morethan 100 delegationsshowed up, eager to tackleone of the most harmfulforms of agriculturalsubsidies.

The “G110”, as thisgroup called itself, issued astrong statement urgingthat export subsidies beeliminated by 2010.

In the event, the HongKong Declarationestablished 2013 as adeadline. As things standnow, we are far from surethis promise will be kept.

But that near-spontaneous movementhad a bigger impact on theresult of the conferencethan any behind-the-scenesnegotiation.

Another example of“collateral action” was therecent Brazilian-Turkishbrokered TehranDeclaration, which madeclear that new perspectivesand approaches arenecessary to solveseemingly intractableproblems.

This initiative,essentially the proposaloriginally made by somepermanent members of theSecurity Council (andultimately rejected), wasbrought to fruition by twoemerging powers.

The recent financialcrisis also made it clearthat the world can nolonger be run by a club ofjust a few.

The economic meltdown– from which, not byaccident, some emergingeconomies were essentiallyspared – represented a“revolution” of some sort,replacing the inoperativeG8 with the brisk G20.

The IMF has justincreased the voting powerof developing nations, thusincreasing its legitimacy aswell. But change indecision-making structuresneeds to go beyond theeconomic sphere.

Barack Obama justannounced US support forIndia’s candidacy for apermanent seat in theSecurity Council.

From finance to peaceand security, nosustainable solution to anysignificant problem can befound if relevant playersare not involved.

The idea is simple:representativeness bringslegitimacy and thus greaterefficacy.

Let us not wait forwidespread crises to bringthe core institutions ofworld governance in linewith the real world. Let uspractice democracy notonly domestically but alsoin the global sphere.

Celso Amorim is Brazil’sforeign minister

Guest ColumnCelso Amorim

Slow­f loating consumer goods arrive

The gaudy blue-paintedboat on the muddy RiverPará in the Brazilian Ama-zon looked like somethingout of Fitzcaraldo, theWerner Herzog film about arubber baron, who at thestart of the 20th centurydrags a steamship over ahill to access a rich rubber-producing territory.

In fact it was an air-condi-tioned Nestlé “floatingsupermarket”, steaminggently downstream, itsimmaculate shelves andfridges neatly stacked with300 of the Swiss company’sproducts.

When the “TerraGrande”, docked at thetown of Barcarena, a crowdof curious locals flocked onboard. Raimunda Pachego

says: “It’s good to comehere to the town, but theyneed to go to the remotecommunities. The cost ofgoods there is a lot more.”

In fact, that is just whatthe boat will do. Nestlé saysit will serve 18 remote com-munities from its home portof Belém, in north-easternBrazil.

More than 30m Brazilianshave risen from povertyover the past decade andthe Terra Grande is part ofa general push by fast-mov-ing consumer goods compa-nies to expand their reachto less well-heeled butupwardly-mobile consumers– both in and far beyondthe main cities.

At a cost of R$1m($590,000), however, it is anexpensive investment – andnot one that will necessar-ily generate much return.

“I don’t want to saywhether we will make aprofit,” says AlexandreCosta, Nestlé director forregionalisation. “But it willgive us customer feedback.”

Over the past decade,many consumer goods com-

panies have thrived by serv-ing the rising “middleclasses” – families earningbetween R$1,115 andR$4,807 ($660-$2,800) amonth and who last yearbecame the majority for thefirst time.

To penetrate this marketmore deeply, some compa-nies have started offeringfree samples in upmarketareas of big cities, as a wayto test consumer tastes, cre-ate ties with them and “pre-launch” or redesign theirproducts.

Companies such as Unil-ver, Brazil Foods, andAmBev, a brewer, haveall joined in with this “try-vertising”.

Because of rising prosper-ity, however, many are alsoturning their attention tolower-income groups.

Over the past six years,the annual growth inincome of the bottom 30 percent of the population hasexceeded 9 per cent, whilethe top 30 per cent hasgrown at half that rate.

Cláudio Felisoni, presi-dent of the Fundação Insti-

tuto de Administração, abusiness school, believesthe increasing availabilityof credit to low-incomegroups is a key factor.

Official data show thehousehold debt-to-incomeratio rose to 35 per cent lastyear, from 18 per cent at thebeginning of 2005.

Prof Felisoni’s research inSão Paulo found 70 per cent

of low earners own mobiletelephones and 55 per centhave credit cards.

Three big retailers, Pãode Açúcar, Carrefour andWalmart, are boosting theirinvestment in businessesand strategies aimed at thelower-middle classes.

McDonald’s is also invest-ing. It announced this yearit was focusing on “Minas

Gerais and the states of thenorth and north-east.” Thenorth and north-east arethe poorest of the country’sfive regions.

In the Amazon, Bradesco,a big bank, last Decemberlaunched a floating outleton the River Solomões, thatsails between Tabatingaand Manaus.

However, the TerraGrande is Brazil’s firstfloating shop.

Nestlé says the country’sC, D and E social classes –the “bottom of the pyra-mid”, or BOP – comprise157m people who accountfor 72 per cent of food con-sumption.

“BOP is the market, notsimply a segment,” says MrCosta. In 2006 Nestlélaunched its Porta-a-Portadoor-to-door project, usinghousewives as freelancesales reps. Today, 7,500 re-vendedores – resellers – earnR$750 a month from it, andare forecast to visit 3.2mhomes this year.

Nestlé has been in Brazilfor almost 90 years. As theeconomy continues to grow

quickly – the currentgrowth rate is 7 per centyear-on-year – the companyis hoping rising incomesamong the poor will bringits higher priced goodswithin their reach.

If the economy keeps onperforming, this seems asafe bet. While 32m havemoved up from the lower Dand E classes over the pastseven years, another 36mcould follow in the nextfour, forecasts the GetúlioVargas Foundation, a thinktank.

The Terra Grande onlysells Nestlé products, andthe absence of staples suchas rice, beans and chicken,not to mention the dearthof fresh fruit or vegetables,would make it hard to cooka full meal after shoppingthere.

Nevertheless, at Bar-carena, as it prepares toleave, local encyclopediasalesman Luzeilton Costaenthuses. “The idea isreally cool,” he says.“Today, you have to inno-vate and go after the cus-tomer.”

RetailingDom Phillips andJohn PaulRathbone on novelways to reach lowerincome customers

‘I don’t want to saywhether we willmake a profit . . .But it will give uscustomer feedback’

Dominanceof Petrobrasmay slowdevelopment

When Petrobras, Bra-zil’s national oil com-pany, raised $70bn inequity in September,

it was not only the biggest shareissue ever undertaken. It was alsoan affirmation of the enormousinvestor interest in Brazil and ofits huge potential as an oil pro-ducing nation.

Yet the issue also raised con-cerns about corporate governanceat Petrobras and about the role ofthe state in Brazil’s fast growingoil and gas industry.

The industry is undergoingtransformational change. Petro-bras has overseen the develop-ment of the national oil and gassector for more than half a cen-tury, enjoying a monopoly on pro-duction and exploration until pri-vate sector competition was per-mitted in the late 1990s.

Petrobras continues to domi-nate the industry, partly throughits privileged position and partlybecause of world-class expertisein deepwater exploration,acquired as the company pushedfurther away from the coast intomore challenging environments.

It is setting out to test thatexpertise in the “pre-salt” fields,discovered in 2007 and so calledbecause they are under severalkilometres of seawater, rock and ahard-to-penetrate layer of salt.

At the same time it has

embarked on an ambitious $224bninvestment programme for 2010 to2014. As well as exploration andproduction in and outside the pre-salt region, this includes refining,energy generation, biofuels andother activities.

Many analysts think Petrobraswill be overstretched, especiallybecause regulations currentlybefore Brazil’s congress wouldmake it the sole lead operator inall future consortia working inthe pre-salt fields.

“The government is embarkingon a route that will clearly lead toa slower pace of development,”says Christopher Garman of theEurasia Group, a consultancy.

“It is limiting development tothe operational and financial con-straints of a single company.There’s a big question as towhether they will be able toattract serious junior partners.”

Petrobras says it has all theexpertise needed to develop thepre-salt fields alone – and thatother companies only want totake part in order to gain accessto its proprietary technology.

It also says it is preparing totrain 250,000 workers, even givingthem basic schooling if necessary.

Petrobras will also be obliged totake a minimum 30 per cent stakein any consortia operating in thepre-salt fields and may have tofund up to 100 per cent at thegovernment’s discretion.

And operations will be overseenby a new, 100 per cent state-owned company with a veto overall decisions, including procure-ment and rates of production.

Some analysts believe Petrobraswill quickly run out of funds andbe forced to return to capital mar-kets for more equity within twoor three years.

The share issue itself raisedother questions. As part of theprocess, the government soldPetrobras the rights to 5bn bar-rels of pre-salt oil, for which thegovernment received $42.5bnworth of new shares in the com-pany.

Since the government controlsPetrobras – it has a majority ofvoting stock but a minority oftotal capital – many investorswere concerned about what theysaid was a conflict of interest, asthe government was the biggestparty on both sides of the transac-tion.

Investors also complained abouta lack of transparency in the waythe price Petrobras paid for the5bn barrels was arrived at andthat the price itself, of $8.51 perbarrel, was too high, as it wouldresult in a rate of return similarto Petrobras’s cost of funding.

“The net present value of theinvestment is zero,” says one fundmanager.

He adds: “Petrobras says that itwill make savings through syner-gies, by using existing platformsalready operating nearby, but itstill seems to be a lot of effort forlittle return.”

More broadly, investors are con-cerned that the government usedthe share issue as a way of gain-ing greater control. Before theissue, it owned about 40 per centof the company’s total capital. Itnow owns about 48 per cent.

Taken together with the regula-tory changes now before congress,this is seen as a further dilutionof the interest of minority share-holders, who still provide the bulkof Petrobras’s capital.

The extent of government in-fluence can be seen in the wayPresident Luiz Inácio Lula da

Silva has ordered Petrobras tobuild refineries that analysts saymake no commercial sense, argu-ing it would be cheaper to exportcrude oil and import refined prod-ucts.

The government’s response isthat it is no secret that Petrobrasis a public sector company andthat if investors do not want toparticipate, they are under noobligation to do so. Investorsreply that they would at least liketo know the degree of governmentinfluence before taking that deci-sion.

Nevertheless, investors alsoagree that, compared with manyother national oil companies, cor-porate governance at Petrobras isof a high standard.

And there are no other oil com-panies in the world, in the privateor public sector, with such a hugedevelopment project before them.

OilJonathan Wheatleyon the effects of theinvolvement of anenormous statecompany in the sector

Luiz Inácio Lula da Silva, the outgoing president, shows hands dirty with the first “pre­salt” oil extracted AFP

FINANCIAL TIMES MONDAY NOVEMBER 15 2010 ★ 5

Brazil

The problem of violence no longer seems intractable

When Sergio Cabral took officeas governor of Rio de Janeirostate in January 2007, one of hispriorities was security at the PanAmerican Games that summer.

Bowing to then-accepted wis-dom, Mr Cabral launched a“mega-operation”: 1,350 militarypolice were sent into the Com-plexo do Alemão, one of Rio’slargest and most violent favelas(shanty towns) and the hub ofthe city’s most powerful druggang, the Comando Vermelho,or Red Command.

The goal was to repress this

small number of heavily armeddrug-traffickers, who ruled overthe slum’s 160,000 inhabitants.But the result was typical. Some44 people were killed, at least 11of whom had no connection tothe drug trade, and when thepolice withdrew the gangresumed their usual business.

Mr Cabral has changed someof his ideas since that ill-fatedoperation. After all, Rio is thepublic face of Brazil. And withthe football World Cup in 2014and the Olympic Games in 2016,the pressure is rising again toimprove public security.

In supposedly drug-torn Mex-ico, for example, the homiciderate is about 14 per 100,000inhabitants. In Brazil, it is 25, inRio 35 and in the north-east areaof Recife, almost 100.

One turning point came forMr Cabral after he made a tripto Colombia in 2007, to observe

the gains in public securitymade in Medellín and Bogotáthrough a combination of toughpolicing and large-scale publicspending.

On his return, Mr Cabralobtained a $1.7bn federal com-mitment to “urbanise” anumber of Rio’s most deprivedfavelas, including the Complexodo Alemão.

A project, called police pacifi-cation units, or UPPs, was alsobegun, under the direction ofJosé Mariano Beltrame, publicsecurity secretary.

Aggressive, temporary incur-sions have been replaced in 13favelas by a permanent militarypolice presence, staffed byrecruits who receive R$500($300) bonuses a month. By 2014,12,500 officers will be deployedin 40 UPPs.

The results so far have beenoverwhelmingly positive. Rio’s

favelas have become relativelypeaceful and monthly crime sta-tistics have fallen significantly.Most importantly, favela resi-dents are being won over.

“This would have never beenpossible before,” says ÁlvaroMaciel Júnior of an outdoor

evening movie club, linked to alocal youth centre that he co-or-dinates in Babilônia, a Riofavela pacified in July.

Free IT and foreign languageclasses are also available at theyouth centre. In gang-controlledfavelas, by contrast, groups ofaloof teenagers preside over

public spaces, machine-gunsslung over their shoulders.

“I don’t think anyone particu-larly likes being in the presenceof the police. But people herecan see the positive effects, andwant the UPP to stay,” MrJúnior adds.

“People no longer accept vio-lence. We still have drug-deal-ers, but now they would beostracised if they brought out aweapon.”

Of course there is great scepti-cism. In addition to drug gangs,militias made up of ex- and off-duty police and firefighters havesprung up.

A UN study this May was thelatest to show how extra-judicialkillings, torture and extortionare widespread among policeforces and in the overcrowdedprison system.

As well as being badly-trained, underpaid, and often

outgunned, the police are alsooften corrupt.

Indeed, the new militias arethought to control 40 per cent ofRio’s favelas, with various rack-ets and their own brutal justice.Some say the recent reductionin crime owes as much to theirrise as it does to the very smallnumber of UPPs.

Another cause for concern isthat the most dangerous favelas,such as Complexo do Alemão,have not been properly dealtwith.

“There may be problems ifthey [the traffickers] come tothe conclusion that they are toostrong for the military policethere,” says Alba Zaluar, co-or-dinator of the Centre forResearch on Violence at Rio deJaneiro State University.

The most common suspicionis that the UPPs are onlyintended for favelas near tourist

areas, and that they will disap-pear after the Olympics. It istrue that the project has guaran-teed finance only until 2016. ButMr Beltrame is bullish. “Resi-dents and society in general willnot want to return to the oldways,” he says. “The achieve-ment is already irreversible.”

For decades, the problem ofviolence in Brazil seemed intrac-table. But the UPPs are not Bra-zil’s only security initiative toenjoy success.

In Pernambuco state in thenorth-east a comprehensivescheme called Pacto Pela Vida,or covenant for peace, whichincludes police and prisonreform as well as social pro-grammes, has greatly reducedmurder rates. Similar projectsare appearing elsewhere.

Such projects offer more thanglimmers of hope – they appearto be gaining momentum.

Wealth isstill unevenlydistributed

Edilson Sergio Goulari isnot the first student toworry about his career pros-pects when he leaves uni-versity. But in Brazil’sbooming economy, it is nota lack of jobs that concernshim. Surprisingly for acountry that casts itself asa “melting pot”, it is thecolour of his skin.

“I try not to think aboutit,” says the black 26-yearold, referring to the paucityof Afro-Brazilian stock mar-ket analysts – his chosencareer. “I try to have themindset that when I lookfor a job I will be judged bymy professional skills, notmy skin colour.”

Like the US, Brazil hassignificant minority black,indigenous and immigrantpopulations. Unlike the US,Brazilians rarely classifythemselves by their race. Ina 2009 survey, 44 per cent ofthe population simplydescribed themselves asmixed.

Even so, Mr Goulari hasalready been judged on hisrace – attaining a place atRio’s State University(UERJ) through a quotasystem that reserves 20 percent of places for black stu-dents.

Many Brazilians takepride in their multiracialsociety and some argue rac-ism is absent. But the expe-rience of blacks trying toprogress professionally tellsa different story – some-thing also reflected in socialindicators.

UERJ, for example, beganits affirmative action policyin 2003. Since then, morethan 1,000 academic institu-tions have followed suit.But the policy has sparkeda furore, with some univer-sities facing court proceed-ings, the most notable beinga Supreme Court caseagainst the Federal Univer-sity of Brasília.

Critics argue that positivediscrimination flouts thecountry’s racially-blind con-stitution. Since slavery wasbanned in 1888, laws havebeen racially neutral. Fur-thermore, because few peo-ple define themselves asblack or white, positive dis-crimination can create diffi-cult shades of grey.

“In Brazil you see peopleof all colours together atfootball games, musicevents, and on the streets,”says Simon Schwartzman aresearcher at the Instituteof Work and Society Studiesin Rio. “Race-based affirma-tive action imposes racialclassification and divisionswhere they didn’t existbefore.”

The country is certainlyracially diverse, with 25mpeople of Italian descent,10m German, and morethan 10m Lebanese. Thereare also more Japanese inSão Paulo than any othercity outside Japan and,because of the history ofslavery, more people ofAfrican descent than anycountry besides Nigeria.

But this diverse mixbelies a more black-and-white economic reality:Afro-Brazilians generallyearn half as much as

whites. They have on aver-age three years less school-ing, and account for two-thirds of those living belowthe poverty line.

Allyne Andrade, a youngblack lawyer, says: “Brazilis mixed, yes, but to be ablack person in a high posi-tion is very difficult. Peopleare surprised if you arevery smart; they treat youlike an alien.”

Brazil’s first and onlyAfro-Brazilian senator,Paulo Paim, believes affirm-ative action is the best wayto redress a history of socialwrongs that began withslavery and was thenmasked by what some call“the myth of racial democ-racy”.

“To become a truly equalsociety, it is necessary totreat unequals unequally,”he says. Such was thethinking behind the RacialEquality Statute created byMr Paim, passed by Con-gress in June and whichmay affect the proceedingsagainst the University ofBrasília.

Wilson Prudente, a publicprosecutor, says: “The stat-ute endorses the need forpolicies that address socialinequalities for blacks atthe highest level, making itmore difficult for theSupreme Court to rule thatthe quotas are unconstitu-tional.”

However, some universi-ties now question whether

racial quotas mask a deeperproblem in the educationsystem: the notoriouslypoor quality of stateschools. These have ahigher number of black stu-dents, as their families typi-cally cannot afford privateeducation.

“The teaching in stateschools is so bad that stu-dents do not even attemptthe university entranceexamination,” says profes-sor Ericksson Rocha eAlmendra, director of thePolytechnic School of Rio’sFederal University. UFRJrecently opted for socialquotas rather than racialquotas – reserving 20 percent of its places for publicschool students.

The country has few mod-els to follow. Mr Paim’sstatute was inspired by theSouth African FreedomCharter. However, SouthAfrica’s policy of affirma-tive action has had mixedresults, with complaintsthat jobs were being filledby poorly trained candi-dates.

The US is also held up asan example. However, Bra-zil never had Jim Crow seg-regation laws. It also has amuch larger black popula-tion. And then there are thepracticalities: in a mixedsociety, who counts asblack?

“We must find a modelthat meets Brazil’s reality,”says Pablo Gentilli, a rightsactivist.

It will be a tricky task,but then Latin America’sbiggest and most raciallymixed country is accus-tomed to inventing its ownway.

‘Brazil is mixed,yes, but to be ablack person in ahigh position isvery difficult’

Politics and finance hold up projects

One thing politicians, econ-omists and business leadersall seem to agree on in Bra-zil is that the country is inurgent need of infrastruc-ture expansion.

Ships can be backed up atports for weeks. Only asmall proportion of roadsare paved, imposing heavycosts on the industries thatmust use them to movegoods for export. For thefast-growing soya exportindustry, it often costs moreto get the product to thecoast than to complete thejourney overseas.

The roads in the denselypopulated south-easterncorridor choke up ratherquickly, especially in busyperiods. Business or holidaytravellers can de delayedfor hours, and some super-

rich commuters in SãoPaulo famously avoid theproblem by relying on pri-vate helicopters.

The state of airport infra-structure is also troubling,especially as Brazil waits towelcome the world on twobig occasions: the footballWorld Cup in 2014 and theOlympic Games in Rio deJaneiro in 2016.

In many poor neighbour-hoods, lack of electricity,housing, or water treatmentkeeps millions excludedfrom the public welfare ben-efits of growth.

There is broad agreementabout the need to improveinfrastructure but a hugeamount to be done. “Studiesindicate that countriesgrowing like ours need toinvest between 4 and 5 percent of GDP [on infrastruc-ture] for decades, says JoãoTeixeira, executive vice-president at Santander Bra-zil. “We’ve been doing just1-2 per cent. If you travelaround Brazil, this discrep-ancy becomes obvious.”

Addressing this has beenmoved to the political fore-ground by the administra-

tion of outgoing PresidentLuiz Inácio Lula da Silvaand president-elect DilmaRousseff.

In 2007, the governmentannounced its Pac (Acceler-ated Growth Programme),that promised spending ofR$504bn ($302bn) on hous-ing, electricity generation,highways and a host ofother infrastructure essen-tials. The total was laterrevised upwards toR$638bn. Then, Mr Lula daSilva and Ms Rousseffunrolled Pac II: R$959bn for2011 to 2014, Ms Rousseff ’sterm in office.

Mr Lula da Silva dubbedMs Rousseff “the mother ofthe Pac” and her involve-ment featured often in herpresidential campaign.

But despite the pro-gramme’s achievements –delivering jobs, housing andbetter lives for many peopleliving in the favelas, orshanty towns – many of theplanned projects remainincomplete.

Generally, the Pac effortshave come up short for twomain reasons.

The first is politics. Some

of the plans require privati-sations, redistribution ofauthority or co-operationwith agencies and local gov-ernments – all tricky, espe-cially in an election year.

“Privatisation is a verydirty word in an electionyear”, says David Fleischer,professor of political scienceat the University ofBrasília. “In 2006, Lula usedthe claim that [his oppo-nent Geraldo] Alckmin

would privatise everythingto help him win,” he says.“And this year, we saw sim-ilar accusations betweenDilma and [rival candidateJosé] Serra.”

Many analysts believe MsRousseff is willing to pressforward with privatisations,especially for roads. But shemay face opposition fromthe left wing of herWorker’s Party. On other

issues, confronting govern-ment agencies, bureaucratsand incumbents will be atest of her political acumen.

The second big problem isfinance.

Because the country hassome of the highest realinterest rates in the worldso as to avoid inflation, pri-vate banks cannot afford tofinance big long-term infra-structure projects.

As a result, developmentsrely heavily on the BNDES,the national developmentbank, to extend credit atlower rates.

BNDES is sometimes crit-icised for distorting creditmarkets with subsidisedrates or being subject topolitical influence, but ithas been a lifeline for biglong-term projects.

Wagner Bittencourt deOliveira, director of infra-structure and project organ-isation at the bank, deniesthat rates are subsidised ordistorting and says thebank is eager to facilitateprivate sector participation.

“Over the past few years,the private sector hasincreased participation –

but in small terms and athigher spreads”, he says.“A small amount of involve-ment from BNDES willbring in a lot of privateinvestment.”

Most bankers and ana-lysts believe that interestrates will come down in thelong term, as the countrymoves away from its hyper-inflationary past, and thiswill bring increased privatesector participation.

It is unlikely there isenough capital available inthe country to fund its long-term needs. Foreign invest-ment will also be necessary.Private-public partnerships,when cleverly executed,have been useful for bring-ing private money intoprojects.

Eike Batista, an entrepre-neur and Brazil’s richestman, has used the country’sequity markets to fund pri-vate infrastructure projectsfor his empire of companies.

But the heaviest weightwill fall on the governmentto make projects happen –that is, for the “mother ofthe Pac” to live up to hernickname.

InfrastructureVincent Bevinssays the BNDESdevelopment bankhas been animportant lifeline

Stricter ruleslure backwesterncompanies

Three decades after theyquit Brazil, western phar-maceutical companies arerushing back to expand

and make acquisitions, just asdomestic groups begin to consoli-date and spread abroad.

In the 1980s, many multination-als left, driven out by high infla-tion, tough price controls, andweak intellectual property rules.

They signed distribution dealswith local companies, but alsosaw market share taken by “simi-lares” – drugs containing ingredi-ents similar to original productsbut often without rigorous testingto demonstrate they are identicalin composition and effect.

Now the environment haschanged. Since the mid 1990s, pat-ent rules and regulatory require-ments for generic drugs havebecome stricter.

A tougher attitude by Anvisa,the national drug regulator, hasimposed “bioequivalence” meas-ures; while new auditing require-ments are reducing the discretion-ary ability of pharmacies to sellprescription drugs or substitutesover the counter.

Such measures are likely fur-ther to reduce the scope for simi-lares by 2013, as a clearer distinc-tion between patented andgeneric products – already famil-iar in the west – emerges.

The changes are luring westerncompanies back, just as growthin their established more de-veloped markets is slowing andthey see the need to expand geo-

graphically to maintain momen-tum.

While sales are coming largelywithout any reimbursement fromstate or private health insurance,the rapid growth in the middleclass – and the increasing numberof pharmacies to meet demand –is stoking expansion that hasturned the country into theeighth largest drug market in theworld by sales.

With the authorities keen toencourage domestic production,Novo Nordisk was an early moverwith its purchase in 2001 of Bio-brás, a large insulin productionplant outside São Paulo.

A more eye-catching recent buy-ing spree began last year whenSanofi-Aventis of France acquiredMedley, boosting its portfolio ofover-the-counter and brandedproducts to complement its owninnovative and “mature” offer-ings.

Last month, Pfizer of the USbought 40 per cent of Teuto,another generics business; andother US, European and Japanesecompanies are studying the mar-ket closely.

Some have so far held backfrom acquisitions, but are invest-ing internally: AstraZeneca, forexample, is gearing up for thelaunch of a series of productscombining its own drugs with oth-ers that are already off-patent.

Meanwhile, national groupshave not been dormant. Aché, afamily owned group and one ofBrazil’s largest branded genericsproducers, has made smallerdomestic acquisitions, and wasconsidering buying Medley.

It has also begun forging alli-ances across Latin America, whileits rival Eurofarma earlier thisyear bought Laboratorios Gautierin Uruguay, as the groups seekeconomies of scale in manufactur-ing and sales across the region.

Even Farmaguinhos, the state-

owned drug company, has beenco-operating with Mozambique.

Domestic research and develop-ment still remains in its infancy,although government researchunits such as the Butantan Insti-tute in São Paulo and OswaldoCruz in Rio de Janeiro are

involved in international scien-tific collaborations and technol-ogy transfer.

The question is whether theircommercial peers will be able totake up the slack before they areacquired by western groups keento return to Brazil.

PharmaceuticalsA tighter patent regimeand requirements forgeneric drugs make themarket more attractive,writes Andrew Jack

RaceAfro­Braziliansgenerally earn halfas much as whites,says Amy Stillman

CrimeLouis Amis findsthat new approachesto policing aremaking a difference

It is unlikely there isenough capital inthe country to fundits long­term needs

Farmaguinhos, the state­owned drug company, has been co­operating with Mozambique

Best­selling drugs List gives picture of nation’s health worries

By its medicines, you shall know the country.Brazil’s list of top­selling drugs reveals much about

national preferences and the state of the healthcaresector alike.

Two “lifestyle” drugs – Viagra and Cialis for erectiledysfunction – are among the leading 10 productssold, outstripping their popularity in many othercountries, according to data from IMS, the healthcareconsultancy.

The more familiar high­ranking presence of Lipitorand Crestor to lower cholesterol and Co­Diovan toreduce blood pressure highlight how far infectiousdiseases have been displaced as a heavy healthcareburden. Their place has been taken by chronic“lifestyle” conditions – only too familiar in westerncountries – that affect the wealthier but ageingpopulation.

Other patented drugs that would typically beamong the top­sellers in many countries are absent.

That reflects restricted access in Brazil to morecostly innovative therapies, because few drugs are

reimbursed by the state or even private insurers.Most are bought “out­of­pocket” by patients.

The best­selling product on the IMS list is Dorflex,an over­the­counter muscle relaxant and painkiller;Neosaldina, a similar product, and paracetamol, arealso among the top 10.

The first two both contain metamizole, which is notused in other countries, including the US, where itwas banned long ago because of a rare side effectcalled agranulocytosis – where the body does notmake enough white blood cells.

Sanofi­Aventis, which makes Dorflex, stresses thatLatin American regulators have reviewed the drugand considered the benefits outweigh the risks.

Not that the IMS numbers are perfect. Like thosein other emerging markets, the data cannot alwayspick up the nuances of a fragmented system thatincludes substantial over­the­counter sales of drugswhich are officially available on prescription only.

Andrew Jack

The increasing numberof pharmacies to meetmiddle class demandis stoking expansion

Sergio Cabral,Rio governor,was inspired bysecurity ideasfrom a trip toColombia

6 ★ FINANCIAL TIMES MONDAY NOVEMBER 15 2010

Brazil

Forest codemust be fixed

The incoming governmentin 2011 will be very awareof the 20 per cent of thevote that Marina Silva ofthe Green Party won inthe first round of thepresidential election.

No government canignore Ms Silva’s bettereducated and more affluentvoters without paying ahigh political price.Politicians of left and rightusually emphasisedevelopment overconservation; much hangson whether a morenuanced view can prevail.

Outsiders obsess aboutthe Amazon, butenvironmental issues gowell beyond the rainforest.The rise of agriculture hasoccurred largely in theCerrado, a biodiversesavannah in the centre ofthe country that is nowthe world’s largest andmost dynamic agriculturalfrontier.

Newly discovered oildeposits lie off one of themost spectacular coastlinesin the world, and the BPdisaster in the Gulf ofMexico was a soberingreminder of what can gowrong.

Even in the Amazon,where deforestationreached record lows in thepast two burning seasons,a deforestation spike lookslikely in 2011 reflectingBrazil’s rapid recoveryfrom recession.

On paper, environmentaladvances were one of MrLula da Silva’s manyachievements. The countryproduced its first detailedclimate action plan in 2008,with targets for reducingdeforestation, its mainsource of carbon emissions,in the Cerrado as well asthe Amazon.

Biofuels, expandingalmost entirely on pastureand cropland rather thannative habitat, along withan energy matrix wherehydroelectricity figuresprominently, mean Brazilhas a much lowertransport and industrialcarbon footprint thancomparable economies.

Protected land systems,especially in the Amazon,were expanding, whileillegal logging declined.Sophisticated compensationschemes channelled oil andother royalties towardsgood environmental causes.

Yet Ms Silva won theenvironmental vote. Why?

It was largely because ofa controversy overreforming Brazil’s ForestCode, which lays out theenvironmental obligationsof farmers and ranchers.

It is rigorous byinternational standards,forcing rural properties tokeep set percentages ofland as native habitat.

More often ignored thanobserved, it neverthelessprovided a complianceframework and recentadvances in satellitemonitoring and concernabout deforestation weregiving it traction.

Heavy governmentinvestment in CAR – the

Rural EnvironmentalRegistry – is extendingsatellite monitoring ofdeforestation on individualfarms and ranches to morethan 100 municipalities inthe Amazon and Cerradoover the next two years, abig step in increasinggovernance on the steadilyless chaotic frontiers.

The reaction from somesections of the farm lobbyto more effectiveregulation was to attemptto gut the code. Proposedreforms effectivelyabolished mostenvironmentalrequirements and gavedeforesters amnesty.

The issue caused apolitical firestorm in therun-up to the election,until it was deferred.

If approved in its presentform the code will rideroughshod over carbonemission targets and beexploited by agriculturalcompetitors. A workablecompromise is the mostserious environmentalchallenge for the nextadministration.

In the longer term, Brazilmust move from theory topractice. Its many excellentresearch institutes havelong argued thatagricultural expansionshould proceed byconverting millions ofhectares of under-exploitedpasture in the Cerrado andthe Amazon, not forestsand grasslands.

Abundant forests andhigh biodiversity mean itis uniquely placed todominate markets incarbon and otherenvironmental services –but this dominanceremains in the future.

A new Amazon Fund,financed by a $1bndonation from theNorwegian government andadministered by thenational development bank,the BNDES, has thepotential to transformfunding and is giving theenvironment ministry newclout.

Yet countervailing forcesare strong. The sameBNDES funnelled astaggering R$10bn ($6bn)into three large beefcompanies, JBS, Bertin andMarfrig, between 2008 and2010, unsurprisinglyexpanding the cattlefrontier in the process.

It is yet to enforceeffectively its regulationson lending to the beefsector. Boycotting theAmazon only shifts habitatconversion to the Cerrado.

Consumers – 75 per centof Brazilian beefconsumption is domestic –are not yet as demandingon environmental issues asthose in western Europe.

Most agribusinesscompanies have also notyet grasped the potential ofmonitoring technologies fortransforming the carbonfootprint of commodityproduction.

Still, as Ms Silvademonstrated, change is inthe air.

David Cleary is directorof sustainable harvests,Latin America, for theThe Nature Conservancy.

Guest ColumnDAVID CLEARY

Evidence of new self­confidence is everywhere

Visit São Paulo or Rio deJaneiro these days andsigns of new-foundprosperity and confi-

dence are everywhere. Popularupmarket restaurants are nowso costly they make the trendyeateries of London or New Yorklook good value.

In the bairros nobres – thedesirable property developmentsloved by Brazilian buyers –prices are surging upwards.

Poorer people too are walkingwith more of a spring in theirstep.

Falling unemployment andrising wages mean the middleclass – just like their British orUS equivalents of a century ago– has a something of a “servantproblem”. A good empregada(maid) or a reliable builder ismuch more expensive than acouple of years ago.

At first glance there seems tobe something of a bubble aboutall this. Certainly, the real –which has appreciated this year

against the US dollar by astaggering 40 per cent – looksovervalued, especially consider-ing the recent deterioration ofBrazil’s external accounts andthe scale of portfolio inflowsattracted by the high interestrates.

And yet there is every reasonto think that Brazil’s emergencecan be sustained. Its compara-tive advantage as a producer ofminerals, food and otheragricultural products is formida-ble.

Rising commodity pricesmean the terms of trade are stillrunning in its favour. Thestrength of the resource basewill become even more pro-nounced when the so-called pre-salt oilfields off the coast comeon stream.

But Brazil is much more thana commodity story or a deriva-tive play on China, whose defi-cits of soy and iron ore are per-fectly complemented by Brazil’ssurpluses.

China’s expansion at thebeginning of the 2000s mayhave served to trigger forwardmomentum, but Brazil’s risenow is being sustained bybig shifts in the domestic econ-omy and in particular by therise of new urban middle andworking class consumers:groups that Brazilians habitu-

ally label the Cs and the Ds.Former President Fernando

Henrique Cardoso can takesome of the credit for this. Hechampioned policies that put anend to decades of chronic – andoccasionally hyper- – inflation.

But if Mr Cardoso made amarket possible, it is PresidentLuiz Inácio Lula da Silva whohas helped inject demand intoit. His government has done

that by introducing a minimumwage policy and radicallyextending the reach of bolsafamilia, the conditional socialgrant that now benefits morethan 12m families.

There has also been a bigincrease in the number of for-mal jobs, with the annual rateof new positions doubling overthe past six years.

In the first eight months ofthis year, 1.93m jobs werecreated – a record-breakingincrease. Again, Mr Lula daSilva has contributed directly

by adding to the public sectorpayroll.

However, analysts suggest amore profound and sustainableprocess has also been at work.This has changed employmentpractices in the private sector.

In some senses this is surpris-ing. The business environmentis highly regulated. It can beexpensive for start-ups to regis-ter, complicated and time-con-suming to pay tax and oner-ously costly to employ workers.

In its most recent annual easeof doing business survey, theInternational Finance Corpora-tion classifies conditions in Bra-zil as among the world’s mostdifficult.

Yet, over the past five years,the country’s capital marketboom has prompted Braziliancompanies to formalise. Withexcitement about growth pros-pects increasing, many havefound investors more thanwilling to value their businessesat a multiple of their papervalue.

The potential money availablefrom a successful initial publicoffering or an issue of deben-tures or corporate bonds far out-strips the savings from taxavoidance.

Formalisation has thereforebecome attractive and hundredsof companies have opened their

books to scrutiny from inves-tors, even if that means comingclean with the tax authorities.

The effect of these trends,documented by Marcelo Neri, aprofessor at the Getúlio VargasBusiness School, has increasedthe size of the C income quintile– households whose incomesrange from R$1,126 to R$4,854($660-$2,900) a month – by 29.1msince 2003.

Seven years ago As, Bs and Csaccounted for 37.9 per cent ofthe population.

By last year, 61.1 per cent – asizeable majority of the popula-tion – were members of thosebetter-off income groups, a shiftthat has boosted demand forproducts from cell phones tohealth insurance. Mr Neri esti-mates that more than 20m peo-ple have escaped poverty overthe past seven years.

Add to this the prospect ofhigher infrastructure spending –current outlays amount to only2 per cent of GDP – linked to the2014 football World Cup and the2016 Olympic Games and Bra-zil’s rise definitely seems tohave staying power.

Richard Lapper is editor of Bra-zil Confidential, a new FT elec-tronic newsletter and premiumresearch service to be launchedearly in 2011

State of the nationRichard Lapper saysthe country is muchmore than a simplecommodity story

High society: São Paulo, the commercial and financial capital Getty

Over the past fiveyears, the capitalmarket boom hasprompted companiesto formalise