THE BRICS ARE SLOWING DOWN:

Sarah,

Several years ago some economist came up with the term “BRIC” to use as shorthand when referring to Brazil, Russia, India, and China.  These countries are grouped together because they are huge and have experienced rapid economic growth over the last decade.  Now, all except Russia are witnessing an economic slowdown- China’s growth is the lowest in three years, India’s growth is the lowest in 7 years, and Brazil’s growth has dropped to zero.  Here’s an extremely oversimplified summary of why:

1.  Economic growth in China and India relies heavily on manufacturing.  The primary markets for these manufactured goods are Europe and America.  Europe is in a never-ending financial crisis and America’s economy is not growing.  Thus, demand for China and India’s goods has been weak.

2.  Relatedly, investment from European and American investors fuels growth in BRIC countries.  Since Europe is being forced to bailout its own economies, there is less money to invest in developing countries.

3.  China and India rely on manufacturing and Russia and Brazil rely on exporting commodities.  Commodities are essentially raw materials- metals, crops, wood, and oil.  When production at Chinese and Indian factories slowed down- so did the demand for these raw materials.  For example, Brazil has exported iron to China for the last decade.  Currently, a drop in demand for iron has led to a drop in Brazilian exports of iron to China.

4.  When economies grow, the wages of workers usually rise.  If a factory has to pay its workers more, it is less competitive globally.  For example, rising wages in China have made Mexican factories more competitive.  Although Chinese workers still earn less than Mexican workers, Mexico’s proximity to the United States allows for lower transportation costs.  When you even out the costs, Mexico may end up with the cheaper product in the American market.

4.  There is also a rash of country-specific problems.  For example, India cannot seem to maintain quality infrastructure.  Infrastructure in this context means roads, railroads, and electricity.  When companies cannot rely on the roads or power supply of a country, they are reluctant to build new factories.

5. I mentioned Russia is still growing.  This is because Russia’s main exports are oil and gas.  Demand for oil and gas has remained steady.  If demand for energy drops Russia’s economy will also suffer.

THE PRICE OF CORN EXEMPLIFIES THE INTERCONNECTEDNESS OF THE WORLD

Sarah,

Food prices are really interesting to me.  This year in South Africa, the price of corn has risen 40%.  This is largely the result of a drought and heat wave in the United States which destroyed a large amount of this summer’s corn harvest.  The smaller supply has led to higher prices.  For a poor South African, this price increase is devastating.

Now the South Africans are looking to Brazil.  Brazil is also a major producer of corn and it has a different growing season because it is in the southern hemisphere.  Thus, Brazil’s crop will be harvested this winter.  If Brazil’s corn crop is healthy, prices will go back down.  If the harvest is weak, prices will stay high.

Bottom line- millions of poor people in Africa are dramatically affected by weather in completely different parts of the world.  That is crazy to me.

BRAZIL IS MOVING INTO AFRICA

Sarah,

There is a new trend of developing countries investing in Africa.  Brazil is growing fast, (it just surpassed Britain to become the sixth largest economy) and is the latest country to join the party.  This intrigues me because Brazil and Africa have an interesting history.  Let’s talk about it.

HISTORY WITH AFRICA:

The Slave Trade:

Brazil was a Portuguese colony.  The Portuguese were the original slave traders, establishing an slave trading agreement with an African ruler as early as 1494.(about the time of Columbus' journey)  By the 1540’s, Portugal had established sugar plantations in its new colony of Brazil and began importing slave labor to work the fields.  Between 1519 and 1867, more slaves found their way to Brazil than any other location in the Americas. (38% went to Brazil while 7% went to North America)  Brazil was also the last country to stop importing slaves, continuing the practice until 1831.  Note that this means slaves were imported from Africa to Brazil for over 300 years.

Rio: Capital of the Portuguese Empire:

In the early 1800’s Napoleon conquered Portugal and the Portuguese Royal Court fled to Brazil.  Thus for a brief spell in the beginning of the 1800’s, the Portuguese Empire and its African holdings were administered by officials in Rio de Janeiro.

Common Language:

As a result of Portuguese imperialism, the African countries of Angola, Mozambique, Guinea- Bissau, Cape Verde, and Sao Tome and Principe speak Portuguese.

INVESTMENT TODAY:

In the last ten years, Brazil’s focus has turned back towards Africa.  Unlike China and America, it does not need oil and unlike Middle Eastern countries it does not need food.  As a result, Brazil is more focused on expanding opportunities for itself and its companies as opposed to extracting resources taking them back home.

So what exactly does it mean to expand opportunities?  What exactly does Brazil do in Africa?  First, it lends money.  The Brazil is lending $150 million to Kenya to build roads in Kenya’s capital.  Second, Brazil builds things.  In Mozambique, Brazil is building a plant that manufactures drugs that fight AIDS.  Third, it expands its diplomatic presence; Brazil has built 36 African embassies in the last 10 years.  Fourth, it makes connections.  Flights have begun from Brazil’s largest city Sao Paulo, to Ethiopia and Brazil has recently finished laying a fiber optic cable that connects Brazil to West Africa.

Bottom Line: Brazil is doing work.