Luiz Fernando Furlan: Economy, Trade, Problems and Innovation in Brazil

Interview with Luiz Fernando Furlan, Minister of Development, Industry and Foreign Trade of Brazil from 2003 to 2007 and Member of the Board of Directors at Brasil Foods

The world is entering a dangerous phase in which many countries are cheating the global trade; China is of course devaluating its currency and Brazil is reacting.  With all these challenges, what are the strategic exterior and interior challenges for Brazil?

I was one of the believers that the Doha Round, launched in 2001 and forecast to end 20 years later, would be an achievement and success. Ten years later, nobody expected that the Doha Round, known when it was initiated as the opening of markets for agriculture, would reach an end.  The world is currently discussing other kinds of crisis; opening trade is not a priority.

 Today, bilateral agreements are much more important than a world round of opening economies.  Brazil has been defending open trade, but many markets are still today protected.  One of the only countries that Brazil cannot export food to is the United States of America due to technical barriers as well as others.  So, opening the market should be an ideal, but what we see today is firm protectionism all over the world.

 Recently, Brazil has taken a measure that I personally disagreed with: increasing taxes on imported cars.  I think this is a bad move that will hopefully end very soon, as it was said that the measure would only be in place for a few months until the end of 2012.  I am against protectionism, but I am pro-reciprocation.  So, when dealing with a country that has fences, why should we open our country without reciprocity?

China is cheating the world.  They are undervaluing their currency, they are bypassing the market.  What do you think about this?

We signed a trade agreement with China by 2004 when Hu Jintao visited Brazil.  That agreement supposed that Chinese markets would be opened to a list of Brazilian products.  This has yet to be accomplished.  So, clearly bureaucracy is not in a hurry everywhere.

The strategic objective of Brazil is to become the fifth largest economy in the world, maintain an annual economic growth rate, maintain impressive rates of reduction of social inequality, etc.  However, there are many challenges, for instance, it is currently running a deficit of 2.3%, and the stock exchange is down by 15%.  Do you think Brazil can overcome these challenges and reach its goal?

First of all, I don’t think it is one of Brazil’s targets to be the fifth largest economy.  That will be achieved through the improvement of certain factors.  It would be natural to go upscale if you play the game well and improve the economy and social issues.  30 to 40 million people have crossed the poverty line to the lower middle class.  If that continues and there is an inertia favoring that, the Brazilian economy and the Brazilian domestic market will keep improving.  Today, we have the lowest level of unemployment in the last 30 years: 5.8%.  There are many sectors looking to employ and can’t find workers; most of the unemployed are 45 to 50 years old. 

Connectivity is one of the priorities of the private and public sectors.  Brazil now has more than 200 million mobile phones. The use of Blackberries and iPhones in Brazil is growing rapidly.  This means that information is easily accessible.  We are a full democracy, we have 12 neighbors and no enemies and we have only one language and nationality. Therefore, the problems of deficit are not permanent.  We have had a consistent trade surplus in last 10 years and the net external debt could be offset with the reserves.  The fact that we have so many problems to solve, such as infrastructure, education, the tax burden, bureaucracy, high interest rates, corruption, means that as we fix each of these problems, the competitiveness of our society and country will keep improving.  That is more an opportunity than a problem in my point of view.

It’s true that Brazil is running a trade surplus, which many critics argue is thanks to the prices of commodities, which have skyrocketed since 2003.

There was a period when everybody was talking about petrol dollars, today you don’t hear about petrol dollars anymore, but Brazil has an equilibrium of energy production – we are self-sufficient in energy and food, which is a major advantage.  Brazil has more than 50% of the forests that existed 1000 years ago, compared to Europe with 0.2% and North America with 19%. 

The official reserves of Brazil’s state-owned, wild areas put together are larger than the state of Texas.  So, when you talk about the environment, we are perhaps one of the most preserved countries in the world in terms of biodiversity.  These are assets for the 21st century; the green economy is increasingly important, as young people are more concerned about the environment than previous generations.

The World Bank is warning Brazil that exports of agricultural products or commodities may lead to the commodities curse and that Brazil needs to find a way of capturing the aggregate value of exchanges with China and of absorbing knowledge and technology.  How important is innovation for Brazil, what is the current state of affairs and do you agree?

I’ve have spoken to those in charge of producing business reports for the World Bank and competitiveness reports for the World Economic Forum and most of what is written there is correct.  Brazil needs to invest much more in innovation. 

We are doing well in some areas, like biotechnology; Brazil has developed plastic packaging from sugar cane and Coca Cola and Danone use plastic bottles they call green bottles – a development originating in Brazil.  Today’s cattle farming in Brazil has been developed using animal breeds from India.  Varieties of grass from Africa have been adapted and improved in Brazil and today we are able to help African countries, taking our experience with their own varieties of grass to them so that they can improve food production.  In IT, there is a lot of creativity in the production of games, software, and services.  Brazilian companies are expanding outside Brazil, in many countries including the US. 

I believe that in the 21st century, each country will find its niche; the time when you could be self-sufficient in everything and the best in everything has passed.  There will be more and more cooperation and interdependence among countries. 

Brazil can be one of the leaders in the green economy; we have renewable energy at the level that no other country has in the world.  We develop engines for cars that are flexible – they can use either ethanol, gasoline or gas – and, as far as I know, no country in the world that is using biofuels at the intensity we are; around 10 to 12 million cars use biofuels in Brazil. 

So, we might not be a replica of China in the model of industry, but there are many niches in the market.  Another point that I want to raise is that, even for commodity production, you need a lot of technology, for example, soya bean production requires a lot of technology.  In the last 10 years, we have developed state-of-the-art harvesting machines in Brazil for almost every crop; including coffee, and sugar cane, which are normally harvested by hand.  So, technology is not only for IT, but basic products as well.

You seem to be very positive about Brazil, but what is your greatest concern for Brazil?  What could put an end to the Brazilian success story?  Would it be the increase of protectionism around the world?  What could possibly go wrong?

I have two concerns for Brazil.  Firstly, the speed at which the country is moving is not ideal; we are not in a hurry.  Countries that are under pressure, normally hasten to get things done.  As the country is in good shape and government approval is high, we should speed up the process.  The other issue that could affect Brazil, more than European crisis, is the pace of growth of China. 

China is the major business partner of Brazil today.  We understand that China also depends on consumer markets, so if the US and Europe refrain from buying goods from China, there will be an effect on raw materials, and their suppliers and that means Brazil could suffer a decline of demand, although this concerns minerals and some other commodities more than food.

 I believe that the demand for food will keep increasing because the habits of consumption are changing; China and many other countries are demanding more protein and Brazil is the natural supplier of food in the 21st century – this will keep moving the economy.  In the field of renewable energy, Brazil also is developing new technologies in wind energy, solar energy, and these are more opportunities than challenges.

When we interviewed people regarding economic, social and environmental sustainability, they said that there is a lack of quality education, lack of infrastructure, a lot of corruption, a lot of red tape and misallocation of resources.  In your opinion, are things improving in Brazil?

We are a country with a full democracy and free press, so you will normally read about scandals almost instantaneously.  In countries that control press, you never know what is happening.  In my point of view, corruption in Brazil is not increasing; rather, it is becoming more visible.  This public awareness means politicians that are accused of corruption and don’t have a reasonable explanation will not be re-elected. 

So, free press in Brazil is one of the top positive points.  The public highlighting what is wrong is also advantageous as it creates an awareness of what needs to be done.  Last year, Brazil had the fastest growing number of passengers in the world, according to IAPA, with an increase of 19.5%.  Of course, this almost created a collapse at the airports since the infrastructure was not available – but that put on the pressure we need to improve infrastructure. 

So, next month there will be improvements to the facilities at the international airport.  So, when you have free press that draws attention to problems, there is positive pressure on the government to solve these problems, as well as consumer awareness, which helps to come up with a solution.

What do you think of entrepreneurship in Brazil?

When you ask a young person in Brazil how they see their own future, to be an entrepreneur is one of the dreams.  Recently, there was a simplification of bureaucracy and the tax system for micro-companies in order to facilitate entrepreneurship.  Brazil is still a very complicated country for entrepreneurs, the cost of bureaucracy here is very high, as is the time needed to start or improve a business – there is still a lot of room for improvement. 
There are many companies opening research centers in Brazil in order to collect good ideas and develop new products and services using the Brazilian workforce and the young people coming out of new universities.

What other issues would you like to draw attention to?

Compared to other countries, I see Brazil as running a marathon.  Our country is running a marathon with a backpack full of stones that reduces our competitiveness.  These stones represent the issues I covered: bureaucracy, infrastructure, education, high interest rates, the tax burden and corruption.  However, as long as we are finding solutions, we can throw away these stones and become lighter and compete better in the marathon. 

The good news is to solve our problems we don’t need external aid, it’s up to the Brazilians.  These problems will be solved, in the short, mid and long term.  By the 2016 Olympics, you will be surprised by the amount of progress in this country.

Looking through the eyes of an investor who could invest in any country, would you invest in Brazil?

All my money is here; it was my best application of assets.  In January 2003, the index of the stock market was 11,000 points, and today it’s 56,000 points.  So, imagine an investor who invested money in 2003, almost nine years ago, the assets would be five times bigger now; not too many countries provided this kind of opportunity. 

Today, a lot of analysts are saying that the stock markets in Brazil are at a very good level for new investments, so I keep moving my investments inside the Brazilian economy.  Consumer products and  energy are particularly profitable fields; they will keep growing, because international and domestic demand is strong.