Brazil’s Growing Middle Class

Stephen DeAngelis

January 14, 2010

I suspect that few analysts ever dream that their work will change the world. But in 2001, analysts at Goldman Sachs coined the term “BRIC countries” as an acronym referring to the fast-growing economies of Brazil, Russia, India, and China. At the time, China was really the focus of most of the economic world’s attention and CIRB or CRIB might have better reflected China’s priority. CRIB was probably dismissed for obvious reasons while CIRB, CBIR, and other letter combinations probably didn’t have the same cachet as BRIC. For whatever reasons, the analysts settled on the acronym BRIC and Brazil ended up getting first mention whenever BRIC countries are discussed. According to Wikipedia, “Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world’s land area and more than 40% of the world’s population.” As for changing the world, Goldman Sachs analysts “did not argue that the BRICs would organize themselves into an economic bloc, or a formal trading association, as the European Union has done.” But the constant mention of BRIC countries in subsequent economic analysis has led to a sense of camaraderie among the four nations that might not otherwise have existed. “On June 16, 2009, the leaders of the BRIC countries held their first summit in Yekaterinburg, and issued a declaration calling for the establishment of a multipolar world order” — a world order in which they expect to play a major role.

Before the BRIC countries can assume global leadership roles, however, they need to ensure that their own economies are in order. Among the four countries, Russia probably has the longest way to go because its economy is connected to so many hybrid companies (see my post entitled The Rise of Hybrid Companies?). India faces challenges created by its bloated bureaucracy, intractable caste system, and grinding poverty. China, although making great strides, still faces challenges associated with a single-party system and economic discrepancies between its coastal areas and interior. Brazil, too, faces a myriad of challenges — security and poverty among them — but it has made significant strides over the past decade. All of the BRIC countries have started to see an increase in the size of their middle classes, especially China and Brazil. A recent article outlines how Brazil’s middle class began growing [“Booming economy, government programs help Brazil expand its middle class,” by Juan Ferero, Washington Post, 3 January 2010]. Ferero begins his report with an example of one woman who rose from the lower to the middle class:

“Teresiña Lopes Vieira da Silva peddles spices and peppers from a street stall, but hers is no fly-by-night business. She sells to restaurants in Rio’s swankiest districts and sees her success reflected in the two houses she has bought. Instead of scraping by, she has joined the middle class in an increasingly affluent Brazil, her accomplishment [was] made possible by government loans and a booming economy.”

Ferero discusses how Brazil managed to replicate Vieira da Silva’s success hundreds of thousands of times in order to create a growing middle class. He continues:

“Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market, investment-grade status for its sovereign debt, vast foreign reserves and an agricultural sector that is vying to supplant that of the United States as the world’s most productive. Brazil’s $1.3 trillion economy is bigger than those of India and Russia, and its per-capita income is nearly twice that of China. Recent discoveries by Brazil’s state oil company are expected to make the country one of the world’s biggest crude producers. An unwieldy bureaucracy and red tape have not slowed foreign investment, which at $45 billion in 2008 is three times as much as it was a decade ago. Economists and social scientists here say the booming trade-oriented economy and innovative government programs are lifting millions from poverty and shaking what was once a certainty: that a person born poor in Brazil would surely die poor.”

Just to be clear, poverty still exists in Brazil. The slums of Rio de Janeiro and São Paulo are notorious for their violence and poverty. As a result, Brazil has the world’s largest armored car conversion industry [“Fearful Brazilians Keep Armored Car Sales Booming,” by Alexei Barrionuevo, New York Times, 5 May 2009]. Barrionuevo reports:

“More than 7,000 vehicles were armored for civilian use in Brazil in 2008, up from 1,782 a decade earlier, and the pace … continued in 2009. … A decade ago, there were just a handful of armoring companies in Brazil. Today there are about 120. São Paulo leads the country — and the world — in making and selling armored cars. Rio de Janeiro, a city with legitimate concerns about stray bullets from gang warfare in the favelas, or shantytowns, overhanging the city, is Brazil’s second-largest market.”

Crime, however, is waning as more and more people emerge from poverty. Ferero continues:

“Since 2003, more than 32 million people in this country of 198 million have entered the middle class, and about 20 million have risen above poverty, according to the Center for Social Policies at the Getúlio Vargas Foundation, a Rio policy group that studies socioeconomic trends. ‘We can generate inclusive growth as probably no other country can, given the scale of the country and the level of inequality,’ said Marcelo Neri, chief economist at the center. ‘Brazil is following what you may call a middle path. We are respecting the rules of the market and, at the same time, we are doing very active social policy.’ Since 2002, a commodities boom has fueled strong growth and lowered poverty across Latin America. But Brazil’s progress is perhaps the most notable because it has far more poor people than any other South American country and has long been one of the world’s most unequal societies. Neri said Brazil has made solid progress by creating 8.5 million jobs since 2003, and by instituting programs such as food assistance for poor families and low-interest credit for first-time home buyers and small-business owners.”

For more information about how the government has worked with banks to fund low-interest credit for first-time home buyers, read my post entitled Brazil Sits on the Cusp of Recovery. In that post, I noted that analysts believed Brazil economy will grow by about 4.5 percent in 2010. That estimate, according to Ferero, has been raised to 5 percent. Brazil’s economic growth is what has allowed a middle class to emerge and millions to escape from poverty.

“The change has been tangible to people such as Thiago Firmino, 28, a teacher. He has lived in a poor locality all his life, but he owns a car and a computer and says his son’s life will be easier than his. … The foundation of today’s success was laid during the administration of Fernando Henrique Cardoso, an academic-turned-politician best known for taming inflation in the mid-1990s. The man who has gotten much of the credit is his successor, President Luiz Inácio Lula da Silva, who as a union activist once railed against globalization. … Lula [made] ending poverty a priority, but he also proved to be a market-friendly steward of the economy and is popular today among Brazil’s business community. With Asia hungry for soybeans, beef and iron ore, economic growth in Brazil averaged 4.2 percent annually from 2003 through 2008, a year in which foreign investment in the country posted a 30 percent increase over 2007, according to the U.N. Economic Commission for Latin America and the Caribbean. The worldwide economic crisis caused a brief downturn here, but economists say Brazil will post 5 percent growth in 2010.”

It is not just the poor who are benefiting from Brazil’s robust economy. “The country’s stock market is minting record numbers of billionaires, and the wealth in Brazil is palpable. Luxury apartment houses are rising in fashionable districts, and the world’s most exclusive stores, from Tiffany’s to Gucci, consider Rio and Sao Paulo fertile markets.” As mentioned above, however, “most of Brazil’s people are far from rich.” Ferero continues:

“In the country’s vast urban slums, many youths turn to drugs, the quality of public schooling is poor and basic services such as health care are chronically underfunded, residents say. ‘Can you believe this serves 150,000 people?’ said Flavio Wittlin, who runs a group that helps get young people off the streets, as he walked through a tiny health center in Rocinha. He said many services in the district, from garbage pickup to policing, are substandard. Still, Rocinha is chock-full of machine shops and small stores, many of them spurred by government loans. Although Brazil’s industrial giants — such as the airplane maker Embraer and the mining company Vale — attract investors and headlines, the future is also rooted in businesses like Alan Roberto Lima’s sewing shop. The shop, on the second floor of his house in a hardscrabble neighborhood on Rio’s outskirts, has only a half-dozen sewing machines. But Lima, 34, has in a few years found that Rio’s upscale boutiques are a ready market for his skirts and blouses. Now he talks of his own clothing line and, if that is a success, opening his own store.”

In Brazil, entrepreneurs like Lima will not only help bring Brazil through the current recession but will also help build a much brighter and more sustainable future. What’s true in Brazil is also true elsewhere — which is why I try to encourage entrepreneurship around the world. You don’t hear as much about Brazilian entrepreneurs as you do about Indian or Chinese entrepreneurs; but, given the size of the Brazilian economy, they will play an important role in both the Brazilian and the global economy in the decades ahead.