Brazil's Infrastructure in Perspective - Defiance EIRA

Defiance Capital Management
Economic and Investment Research & Analysis
Brazils Infrastructure in Perspective:

Yesterday, Today and Tomorrow
February 27, 2010 - 10 pages
Leonardo Cardoso Senior Analyst

leocardoso@defiancecap.com
www.defiancecap.com
Defiance Holdings All rights reserved. Copyright 2009-2010. 1

Defiance Capital Management Investment Research and Analysis
Brazil: Yesterday, Today and Tomorrow
By Leonardo Cardoso
Yesterday
For a little more than 300 years since its discovery on April 22, 1500, Brazil was a colony of
Portugal. In an effort to force Brazilians to consume products manufactured in Portugal, the
crown prohibited the establishment of factories in the country. As a result, that was a period of
economic exploitation of natural resources, most notably brazilwood, sugar and gold, and little to
no industrial development.
On September 7, 1822, independence from Portugal was declared and the country became a
constitutional monarchy, the Empire of Brazil. In the beginning, the Imperial State invested
heavily in infrastructure improving roads, building railroads and retaining an excellent system
of ports. The liberal monarchy, free of the socioeconomic and political pressures from Portugal,
favored private initiatives and centered the economy on the export of agricultural products and
raw materials. By mid 1800s, coffee had become the number one export of Brazil and a
movement to abolish slavery and free labor had begun. With profits from the export of coffee,
sugar and cotton, new factories that didnt require specialized labor were built and immigrants
from Portugal, Italy and Germany, lured by the demand for paid labor in the agricultural fields
and factories, flocked to Brazil.
Although extremely diversified in the period after Independence, the Brazilian economy required
a great effort to carry through the change from a pure colonial economic system based on slavery
into a modern capitalist system. Towards 1880s, the combination of religious issues between the
Emperor and the Catholic Pope; growing discontent by military leaders towards freedom of
speech and corruption in the Imperial Court; desire by the middle class to participate in political
matters; lack of support by the barons of coffee who resented the abolition of slavery and wished
more political power; and financial problems generated by the Triple Alliance War, forced the
Brazilian Empire into crisis. On November 15, 1889, republicans who favored changes by
revolution rather than evolution, drew military officers led by Field Marshal Deodoro da Fonseca
into a conspiracy to replace the cabinet; the first coup dtat of Brazil deposed Emperor Dom
Pedro II and created the First Republic of Brazil (aka: Old Republic) and its First Provisional
Government.
Generally, federalism is the movement of the people towards centralization and transfer of power
from the States to the Federal Union. The unusual development of federalism in Brazil
decentralization of power and politics into States formed under a new Federal Union, gave birth
to a political and socioeconomic system of oligarchies 1 that are still present today. The Old
Republic lasted until the Revolution of 1930, and despite some political turmoil, it was a period
of economic prosperity due to strong coffee and rubber exports.
1
Oligarchy in Brazil can be exemplified by strong military influence in the government during the early period of
the Old Republic and by the Caf au lait political system; the alternation of political power between prominent
groups/families from only two states (Sao Paulo economic power due to coffee production and Minas Gerais
largest political poll in the country and producer of milk).

While dissident movements taking place throughout the 1920s weakened the political alliance
between Sao Paulo and Minas Gerais2 and the stranglehold of the agricultural oligarchies eased,
the U.S. market crash of 1929 pushed the country into financial collapse when the price and
demand for coffee stumbled and foreign credit, together with Brazilian gold and sterling reserves
evaporated.
In 1930, important structural changes aimed at transforming the country into a modern
industrialized economy began to take place when Getulio Vargas, a presidential candidate for the
liberal opposition with nationalist and populist tendencies led a second coup dtat and assumed
the presidency of Brazil (aka: The Revolution of 1930).
Somewhat like Franklin Roosevelt, Vargas sought to bring Brazil out of the Great Depression
with an economic stimulus focused on infrastructure and statist-interventionist policies focused
on expanding the domestic industrial base while reducing foreign dependency. State and mixed
public-private companies dominated infrastructure industries, while private Brazilian capital
dominated manufacturing. In 1937, rumors of a possible communist plan to control the country
triggered a full dictatorship by Vargas; creating the New State, which lasted until 1945 when a
military movement overthrew him and reestablished democratic rule.
As a dictator who dissolved congress, curtailed presidential elections and established a new
constitution, Vargas gave continuity to the formation of structure and professionalism in the state.
He oriented the state to intervene in the economy, promote economic nationalism, invest in
infrastructure and industrialization3, and establish labor rights and laws. After leaving behind an
economic surplus and a growing industry, Vargas returned to politics in 1950 as the
democratically elected president with almost 50% of the votes, but could not handle the
pressures of a democratic government and committed suicide in 1954.
While the Vargas Era laid the infrastructure, industrial and labor rights4 foundations of Brazil,
Juscelino Kubitschek (JK), a democratic president elected in 1955 using the slogan 50 years of
progress in 5 years, focused on the industrial development of the country through generous
incentives to foreign direct investments and large infrastructure projects including the
construction of Brasilia, the current capital of Brazil. Despite the tremendous economic boom, by
the end of his term in 1961, the strategy had left a legacy of problems and distortions since the
growth it promoted resulted in a substantial increase in imports while exchange rate controls
curtailed exports. In addition, to finance the negative balance of payment and the construction of
Brasilia, the Federal Government relied heavily on domestic and foreign debt.
Rampant inflation, political and social reforms that were clearly not addressing the economic
problems of the country, together with fears of a revolutionary leftism by then current president
Joao Goulart, triggered the military coup dtat of 1964, instituting a military regime for the next
21 years. At first, there was intense economic growth due to neoliberal economic reforms (aka:
Economic Miracle of Brazil), but in the later years of the dictatorship, the reforms had left the
2
As before mentioned, the Caf au lait politics.
3
Industrial and infrastructure concerns created: National Oil Advisor, Rio Doce Valley Company, Sao Francisco
Hydroelectric Company, National Iron Smelting Company, Petrobras and others.
4
Although, argued by some economists and politics as not capitalist friendly.

economy in a state of chaos, with soaring inequality of income, exorbitant inflation (accentuated
by the oil shock), very high unemployment, and humongous national and foreign debt.
While stagflation sets in during the first half of 1980s, the military regime ends in 1985 with a
civil movement that brought together diverse elements of the Brazilian society demanding direct
presidential elections. The movement resulted in the indirect5 election by the Electoral College of
Tancredo Neves, the first civilian president to run the country since the coup dtat of 1964.
However, with the death of Tancredo Neves right after his election, Jose Sarney, the vice
president elected, took office on April 21, 1985. In 1988, the government proclaimed a new
constitution that restored civil and public rights such as freedom of speech, independent public
prosecutors, economic freedom, direct and free elections, and universal health care.
However, economically speaking, the country was decimated; since the 1970s, inflation,
domestic and foreign debts had been out of control. From 1985 until the first presidential
impeachment in 1992, there were seven economic plans aimed at fighting inertial inflation 6 ,
economic stagnation, unemployment and souring debts. Find below a summary of those plans
and details about their failures.
Date Economic Plan Problem/Focus Action taken Result

(Plano)
02/1986 to Plano Cruzado I Hyperinflation Creation of a new Total decline in the supply of
11/1986, and stagnation currency and suspension consumer staples and goods;
of inflation accounting; retail sales crashed.
Avg. AIR7 freeze of prices of goods Moreover, the short-lived
range: 144% & services and salaries; restoration of purchase
to 256% fixing of the exchange power led to the return of
rate; creation of inflation.
unemployment benefits.
11/1986 to Plano Cruzado Hyperinflation, Unfreeze of prices of Overvalued currency due to
05/1987, II stagnation, and goods & services; fixed exchange rate led to an
escalating budget increase in taxes; return increase in imports, a
Avg. AIR deficit. of inflation accounting. decrease in exports and
range: 204% eventual evaporation of
to 278% foreign reserves.
01/1987 to Foreign Debt Evaporation of Suspension of debt Access to foreign debt
06/1987 Moratorium foreign reserves payments to international market vanishes
creditors (moratorium).
5
Here meaning not by the direct vote of citizens of Brazil.
6
The tendency of inflation to grow exponentially, reaching hyperinflation, due to a vicious cycle of price
adjustment/forecast of inflation and subsequent price readjustment based on the forecasted forecast of inflation (ie:
future expectation of inflation based on future inflation, a subjective estimation of inflation or preemptive
adjustment without cost assessment.)
7
Annual inflation rate

Date Economic Plan Problem/Focus Action taken Result
(Plano)
06/1987 to Plano Bresser Hyperinflation, Freeze of prices again; Real losses in savings
01/1989, stagnation, and increase in taxes to help accounts due to the
escalating budget balance the budget maladjustment of inflation
Avg. AIR deficit. deficit; suspension of and inflation accounting.
range: 366% large infrastructure
to 425% projects and agricultural
subsidies; end of
moratorium.
01/1989 to Plano Verao Hyperinflation, Creation of new
03/1990, stagnation, currency; suspension of
escalating budget inflation accounting;
Avg. deficit and real establishment of parity to
inflation: losses in savings US dollar.
350% per accounts.
year
03/1990 to Plano Collor I, Hyperinflation, Creation of new Approximately 16% decrease
10/1992 II and Marcilio stagnation, and currency; holding 80% of in GDP and a decline in
escalating budget private assets hostage for annual inflation to
Avg. deficit. Plan 18 months in an effort to approximately 60% a year.
inflation: focused on cool demand; increase in Privatization of a number of
+500% per freezing financial transaction state owned companies
year government taxes, indexation of among them: Acesita,
liabilities (ie: taxes, elimination of Embraer (NYSE: ERJ),
internal debt) and fiscal incentives; Telebras, and Vale do Rio
restricting money adoption of floating Doce (NYSE: VALE).
flow in order to exchange rate; gradual
halt inertial economic opening to
inflation. foreign competition;
freeze on prices and
wages; dissolution of
several government
agencies and a plan to
reduce 300,000
employees, while
stimulating privatization
and initiating economic
deregulation.

Today
The Brazil of today started to take shape with the election in 1989 and subsequent impeachment
in 1992 of Fernando Collor, the first democratic president directly chosen by popular vote in 25
years. Under a new political and economic team led by Fernando Henrique Cardoso, who would
become the next president of Brazil, the first steps to reign over the lingering economic problems
of the country were taken in 1994 with the launch of the Plano Real (Real Plan).
Realizing that one of the reasons 8 for the hyperinflation problem was the psychological
disconnect between the current perception of the value of money and future purchasing power,
the new plan created a non-indexed unit of monetary value; the URV, a fake currency pegged
to three price indices and fixed at a 1-to-1 parity to the U.S. dollar. Later the URV transformed
into the current Brazilian currency, the Real.
Between 1994 and 2002, inflation-targeting policies, privatization of state-owned companies and
banks, renegotiation of domestic public debt, strict fiscal and contractionary monetary policies
such as expense control and high interest rates, and favorable international commerce policies,
helped Brazil to attract a large amount of foreign capital and consequent appreciation of the Real
vs. the U.S. dollar. The strong Real was fundamental to fight hyperinflation because it assured
the supply of cheap imported products, forced domestic producers to sell at lower prices in order
to maintain their market share and kept in-check demand-side inflationary pressure from the
reestablishment of purchasing power. As a result, after 7 failed economic plans, 6 different
currencies and 1,142,332,741,811,850% (1.1 quadrillion%) inflation from 1965 to 1994, the
Plano Real succeeded in breaking the hyperinflationary cycle bringing inflation down to
single digits per year, stabilizing the Brazilian currency, and laying the foundation for a
socioeconomic recovery and infrastructure development.
Sample of inflation rates before and after the Real Plan:

Jan Feb Mar Apr May Jun Jul Ago Sept Oct Nov Dec
1993 32.3% 30.7% 32.0% 33.5% 37.0% 35.1% 37.0% 36.2%
1994 42.2% 42.4% 44.8% 42.7% 40.1% 46.6% 6.1% 5.5% 1.5% 1.9% 3.3%
In 2003, the country took another step in the journey to political and socioeconomic development,
when for the first time since the military regime, a left/socialist leaning candidate won the
presidential election. Luis Inacio Lula da Silva (Lula), the current president of Brazil was not
directly part of the oligarchies that have dominated the country since its independence and
proclamation of republic. His election signaled a change in the balance of political power, a shift
from the generational oligarchies to citizens without pedigree. Understandably, financial markets
were rattled because political and economical stability were at stake; but for the surprise of
skepticals, the new president continued on the path towards progress.
8
Fiscal policy, which led to budget deficits, was another influential reason to hyperinflation.

Tomorrow
The Brazil of tomorrow is shaping to be the leader among the emerging economies. While
political, economic, and social reforms during the last 20 years enabled recent macroeconomic
stability, investment in infrastructure is a crucial part of the capital accumulation required for
sustainable socioeconomic development and growth. In addition, international institutions such
as the World Bank, the International Bank for Reconstruction and Development (IBRD) and the
International Finance Corporation (IFC) are deeply committed to guide and assist initiatives that
lay the foundation for the future of Brazil.
Recently, the current administration launched a program aimed at catching up for the lost
decades of 1980s and 1990s. The Growth Acceleration Program (aka: PAC) is a strategic plan
between the public and private sector focusing on the development of infrastructure and
reestablishment of socioeconomic growth.
Based on an investment of US$360.0 billion9 between 2007 and 2010, the program expects to
achieve an average GDP growth of 5% per year. Investments are taking place in the following
areas:
o Infrastructure, including social infrastructure projects in sanitation, housing
construction, energy, public transportation systems and water management resources
o Stimulation of Credit and Financing
o Environmental Regulation
o Tax Relief
o Long-Term Fiscal Policies
The source and allocation of funds are described below:
Source of funds Amount (USD:BRL 1.80)

State owned companies, including Petrobras USD 157.1 billion
Federal Government USD 46.9 billion
Private Sector USD 155.5 billion
Allocation of funds Amount (USD:BRL 1.80)

Energy Projects (includes electricity USD 164.5 billion
generation & transmission, oil & natural gas
and renewable fuels)
Infrastructure Projects (includes urban USD 142.2 billion
electricity, basic sanitation, housing and water
management)
Transportation Projects (includes roadways, USD 53.2 billion
railways, hidroways, ports, airports and
merchant ships)
9
R$648.0 billion reais @ USD:BRL 1.80 and approximately 20% of 2009 est. GDP

As of the end of 2009, the Growth Acceleration Program invested US$223.9 billion, or 63% of
the expected total investment. Finished projects totaled US$142.7 billion, or 40% of the total
investment and without counting sanitation and housing projects, there are approximately 2,400
projects in progress. Find below a summary of developments by areas of allocation:
o Energy
o US$97.2 billion invested secured the energy needed to grow in the near future;
o The electricity grid increased supply by 6,000 megawatts
o 109 power plants were constructed and 89 are under construction;
transmission lines cover 8,841 miles;
o Record production of oil and its byproducts with 13 new exploration
platforms under operation and 5 more under construction;
o 1,958 miles of gas pipelines were put in place and 1,254 miles are under
construction
o The Pre-Sal discovery accelerated investment in oil vessels, exploration
platforms, and dry docks.
o Infrastructure
o US$97.7 billion invested in sanitation projects, water treatment facilities,
electric utilities, irrigation, housing, etc
o Transportation
o US$28.8 billion invested in 1,361 miles of completed roadways, 4,096 miles
under construction and over 44,100 miles inspected and serviced;
o 296 miles of completed railways and another 2,200 miles are under
construction.
o 18 ports are under expansion and renovation projects
Conclusion
From Colony to Kingdom to Republic to Military Dictatorship and to Republic again, the
country is ready for its next phase, a phase of leadership among the emerging economies of the
21st century. The political system completed its full circle when Lula, a union worker with
humble origins and no connection to oligarchic families from the Old Republic period of coffee,
milk and sugar barons, conquered the unimaginable political power that, not so long ago, was
reserved only to a select group of few. On the socioeconomic front, improving job markets and
real gains in the minimum wages have contributed to the reduction of poverty. Furthermore,
revolutionary government initiatives and welfare programs 10 attempting to reduce short-term
poverty by direct cash transfers, and long-term poverty by increasing human capital through
conditional cash transfers have proved effective in breaking the vicious circle of
intergenerational11 poverty; thus, decreasing social inequality and child labor while increasing
childrens school attendance.
10
Zero Hunger, Family Stipend (School and Food), My House My Home, and Electricity to All
11
From one generational to another.

Undoubtedly, there are still many problems to be fixed. The country faces important
development challenges in areas that include the combination of the benefits of agricultural
growth, natural resource exploration, and environmental protection. In addition, differences
between urban and rural population, north and south, and rich and poor still persist. Nevertheless,
innovative social programs and a more inclusive growth in recent years have been gradually
decreasing these inequalities.
In summary, the country is investing in its infrastructure and its people. It is gaining international
trust as a candidate for a permanent seat in the U.N. Security Council and it has two more tools
to promote social transformation by hosting the two largest and truly international sports event of
this decade: the 2014 FIFA World Cup and the 2016 Summer Olympics. The future looks bright.
Quick Facts12
Name: Federative Republic of Brazil

Capital: Brasilia
Language: Portuguese
Area: 3.3 million square miles (5th)
Population (2009 est.): 192.0 million (5th)
Life expectancy: 69 years (men), 76 years (women)
Religion: Roman Catholic (74%)
Currency: Real (R$)
GDP: US$ 1.612 trillion (2008), US$1.984 trillion (2009) (9th)
GDP growth: 5.7% (2004), 3.2% (2005), 4.0% (2006), 5.7% (2007), 5.1% (2008), 0.1%
(2009 est.)
GDP by sector: Agriculture (5.5%), industry (28.7%), services (65.8%)
GDP per capita: US$8,295 (2008), US$10,455 (2009)
Annual Inflation: 5.9% (2008), 4.3% (2009)
Civilian Labor Force: ~101.0 million (2008)
Unemployment rate: 7.9% (2008)
Exports: US$197.9 billion (2008), US$158.9 billion (2009 est.)
Imports: US$173.2 billion (2008), US$ 136.0 billion (2009 est.)
Major export partners: USA (14.0%), Argentina (8.9%), China (8.3%), Netherlands (5.3%),
Germany (4.5%), Japan (3.1%)
Major import partners: USA (14.9%), China (11,6%), Argentina (7.7%) , Germany (6.9%), Japan
(3.9%), Nigeria (3.9), South Korea (3.1%)
Main export goods: transport equip., iron ore, soybeans, footwear, coffee, auto & auto parts,
machinery
Main import goods: machinery electrical and transport equip., chemical products, oil, auto parts
and electronics
12
Where needed, the exchange rate of USD:BRL 1.8 was used.

Reference
o Fausto, Boris and Devoto, Fernando J. Brasil e Argentina: Um ensaio de histria

comparada (1850-2002), 2. ed. So Paulo: Editoria 34, 2005, p. 26, 37, e 46
o Sodr, Nelson Werneck. Panorama do Segundo Imprio, 2. ed. Rio de Janeiro:
GRAPHIA, 2004, p. 197
o ABRUCIO, Fernando Luiz. Os Bares da Federao: os Governadores e a Redemocratizao
Brasileira. So Paulo: Editora Hucitec, 1998.
o STEPAN, Alfred. Federalism and Democracy: Beyond the US Model. Journal of Democracy 10,
n. 4 (1999): 19-34.
o Freire, Paulo; Donaldo Pereira Macedo (1996). Letters to Cristina. p. 251.
o Banco Central do Brasil. Disponvel em BCB
o http://pt.wikipedia.org/wiki/Hist%C3%B3ria_do_Brasil
o http://pt.wikipedia.org/wiki/Hist%C3%B3ria_econ%C3%B4mica_do_Brasil
o http://pt.wikipedia.org/wiki/Plano_Real
o http://pt.wikipedia.org/wiki/Programa_de_Acelera%C3%A7%C3%A3o_do_Crescimento
o http://www.brasil.gov.br
o http://www.brasil.gov.br/pac/balancos/copy_of_copy_of_copy_of_5balanco/
o http://democraciapolitica.blogspot.com/2009/02/recursos-do-pac-vao-alem-de-2010-
com.html
o http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/BRAZILEXT
N/0,,menuPK:322347~pagePK:141159~piPK:141110~theSitePK:322341,00.html
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