How Brazil made it

In my column last week, I tried to explain the mystery of success at the individual level by leveraging Malcolm Gladwell’s work in Outliers. On Twitter, Munene Mwaniki recommended a read Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson for what he refers to as a spot-on theoretical construct.   

Since I had reviewed Munene’s recommended book in myBusiness Daily column, I have decided to approach its content through a positive story on how Brazil made it.

Since independence from Portugal in 1822, the story of Brazil has largely been less than colourful. The economy struggled for most of the 19the and 20the centuries, with many of its people living in favelas (shanties). According to Wikipedia’s Economic History of Brazil:

Through the 1980s and 1990s, the Brazilian economy suffered from rampant inflation that subdued economic growth. After several failed economic initiatives created by the government, in 1994 the Plano Real was introduced. This plan brought stability and enabled Brazil to sustain economic growth over that of the global economy through the coming decade. Despite this rapid development the country still suffered from high levels of corruption, violent crime, functional illiteracy and poverty.

Chana Joffe-Walt’s article “How Fake Money Saved Brazil” on NPRs Planet Money blog describes how Brazil faked its way out of trouble. It isa story about how an “economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked.” 

READ: SHIKWATI: Africa must create its own development dream like all other continents have done

In 1992 a new minister for finance was appointed. He had no background in economics or finance and so he called an economist by the name Edmar Bacha, telling him he needed help to bring down inflation. This problem had persisted since 1950, when the government printed money to build a new capital in Brasilia. 

The inflation pattern was by now the main problem with the political class, which, as Walt puts it, saw things this way:

1. New President comes in with a new plan.

2. President freezes prices and/or bank accounts. 

3. President fails.

4. President gets voted out or impeached. 

5. Repeat.

Bacha with three other economists from the Catholic University in Rio came up with the idea of fake currency to trick Brazilians out of their persistently depreciating cruzeiros. They travelled to Brasilia to meet with the President and formalise their dream. They created a fake currency which they called the Unit of Real Value — URV. Walt wrote:

People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency. Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable — what changed was how many cruzeiros each URV was worth. Say, for example, that milk costs 1 URV.

WILL INFLATION END TOMORROW?

On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros. The idea was that people would start thinking in URVs — and stop expecting prices to always go up. "We didn't understand what it was," says Maria Leopoldina Bierrenbach, a housewife from Sao Paulo. "I used to say it was a fantasy, because it was not real."

Still, people used URVs. And after a few months, they began to see that prices in URVs were stable. Once that happened, Bacha and his buddies could declare that the virtual currency would become the country’s actual currency. It would be called the real. "Everyone is going to receive from now on their wages, and pay for all the prices, in the new currency, which is the real," Bacha says. "That is the trick." 

The day they launched the real, Bacha says, a journalist friend asked him, "Professor, do you swear that inflation will end tomorrow?"  "Yes, I swear." Bacha said. And, basically, inflation did end, and the country's economy turned around. In the years that followed, Brazil became a major exporter, and 20 million people rose out of poverty.

There are many lessons we can learn from this crazy idea. First is the fact that the new minister of finance accepted that he needed help to understand his new portfolio and sought help from those who knew better.  

Second is the fact that the then President of Brazil accepted to take a risk with something that at most sounded stupid. Third is the fact that Brazilian leadership accepted to allow mistakes to be made in good faith. 

EXTRACTIVE COLONIAL INSTITUTIONS

These three lessons here are never encouraged in our part of the world, yet success is a mirage if you are not willing to make mistakes or accept responsibility without passing blame. 

With devolution, we now see leaders who are completely in the dark but pretend that they are in the driver’s seat when indeed they would get help if they sought it sincerely.

This is perhaps why Acemoglu and Robinson thought of a new theory, that “to prosper, citizens need inclusive institutions which create virtuous circles of innovation, economic expansion and more widely held wealth.”

Our 2010 Constitution was meant to decimate extractive colonial institutions and replace them with inclusive institutions, but old habits die hard. Acemoglu and Robinson argue:

British colonial authorities built extractive institutions in the first place, and the post-independence African politicians were only too happy to take up the baton for themselves. The pattern was eerily similar all over sub-Saharan Africa.  There were similar hopes in post-independence Ghana, Kenya, Zambia, and many other African countries. Yet in all these cases, extractive institutions were re-created in a pattern predicted by the vicious circle – only they became more vicious as time went by.  In all these countries, for example, the British creation of marketing boards and indirect rule were sustained.

This may explain why the Council of Governors is seeking the powers of Malcolm MacDonald, the last governor of Kenya. 

FROM RECIPIENT TO DONOR

Brazil, like Kenya, was a country that was considered to have potential but was held back by bad politics. With 200 million people (2013 data) living on 3.288 million square miles, it is the world's fifth-largest country, both by geographical area and by population. 

Within less than 25 years, it has moved from a donor-dependent country to a donor of development aid. This happened largely due to the fact that the country started to exploit its potential.  In terms of agricultural value added per worker, Brazil grew from $2,800 in 2001 to more than $5,500 compared to Kenya that virtually remained stagnant at $365 in the same period. 

Brazil has largely mechanized its agricultural production and built great plantations. Due to economies of scale, their products are cheaper than ours. Today Brazil exports agricultural outputs to virtually all African countries including South Africa. 

More than 75 per cent of Brazilians live in urban areas, making it easier to move millions out of poverty. Only one-fifth of Brazilians are farmers.

Brazil has also greatly benefited from its location in the heart of Latin America. Kenya, which is at the heart of Africa, is largely stagnant, stifling her agricultural production with subsistent farming. Land sub-divisions have impoverished the people, and most of those we call farmers today are rural idlers, waiting for politicians to give them handouts. 

MORE TRANSIT PASSENGERS

To become a global player especially in agriculture, we must move towards commercial farming and develop modern distribution systems that would guarantee the farmers value for their produce. Marketing boards, as argued by Acemoglu and Robinson, are remnants of exclusive economic systems that the British built and our politicians adopted selfishly.

We also must exploit our location which is a natural competitor of Dubai. If we built an airport the size of Dubai's and built hotels around the airport, we could reduce the more than 120 million transit passengers who go through the Middle East to Asia. It is possible we can take up to 20 million passengers if we created better transit facilities. 

If that were the case, then the airport alone will be a great demand driver for our agricultural output since those 20 million passengers would have to eat. This is how we can improve our miserable tourist numbers from 1 million to more than 5 million within a short period, just by exploiting our location advantage. 

As Thomas Edison said, “Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.”

Bitange Ndemo is a senior lecturer at the University of Nairobi's School of Business, Lower Kabete campus. He is a former permanent secretary in the Ministry of Information and Communication. Twitter: @bantigito