(Part Three)

Brazil's inflation trap

Brazil's biggest problem – which began with the colonial settlement process and continues to the current day – is that it is simply not capable of growth that is both sustained and stable. Economic growth anywhere in the world is inflationary: Demand for arable land, labor, transport, capital and resources pushes the prices of all of these inputs up. Growth in most places can continue until those inflationary pressures build and eventually overtake any potential benefit of that growth. At that point, growth collapses due to higher costs and a recession sets in. Brazil's burden to bear is that land, labor, transport infrastructure and capital exist in such extreme scarcity in Brazil that any economic growth almost instantly turns inflationary. Arable land, transport infrastructure and capital have already been discussed, but labor requires a more thorough examination, particularly given contemporary Brazil's population of 194 million.

The labor issue is rooted in external pageBrazil's oligarchic economic systemcall_made, something that also has a geographic origin. Brazil suffers from low capital generation and high capital costs – the opposite of most of the world's economic power centers. In those power centers, the relative omnipresence of capital allows a democratization of economic power.

In the American experience, anyone could easily venture out of the cities into the lands of the Greater Mississippi Basin and, within a year or two, be exporting agricultural produce to both American and European cities. In Brazil, by contrast, massive amounts of capital were needed simply to build roads up the Grand Escarpment. The prospect of a common citizen establishing an independent economic existence in that sort of environment was unrealistic, as the only people who had the capacity to "build" Brazil were those who entered the country with their own pre-existing fortunes. So while the early American experience – and the industrialization that followed – was defined by immigrants from Europe's rural poor seeking land, Brazil was started on its path by rich Portuguese settlers who brought a portion of their fortunes with them.

The American culture of small businesses long predates independence, whereas its Brazilian equivalent did not take root until the immigration waves of the late 19th century. As could be expected in a location where capital was rare but the needs for capital were high, these oligarchs saw no reason to share what infrastructure they built with anyone – not even with each other.

Complicating matters was that early Brazil did not have full access to that France-sized piece of arable land – most of it lay in the interior on the wrong side of the Grand Escarpment. The tropical climate drastically limited agricultural options. Until the mid-20th century, the only crops that could be grown en masse were plantation crops, first and most famously sugar, but in time coffee, citrus, bananas and tobacco. But unlike more traditional cereal crops that only require a few weeks of attention per year, such tropical crops are far more labor intensive in their planting, tending, harvesting and transport. Tobacco had to be cut and dried; sugar had to be cut, cooked and refined. Whereas a grain field can be quickly harvested and dumped into a truck, harvesting and transporting bananas, for example, takes much longer.

These characteristics impacted Brazil in two critical ways.

First, the capital required for these plantations was so great that smallholders of the American model were largely shut out. No smallholders meant no small towns that could form kernels of education and industrialization. Instead, plantations meant company towns where economic oligarchies gave birth to political oligarchies. In time, the political and economic power imbalance would provide the foundation for the Brazilian military governments of the 20th century. Even in modern times, Brazil's geography continues to favor oligarchic plantation farming to family farming. At present, 85 percent of farms in the United States – a country with a reputation for factory farming – are 500 acres or fewer, whereas 70 percent of Brazilian farms are 500 acres or more.

Time has not moderated this trend, but rather deepened it. In the latter half of the 20th century, Brazil launched a massive agricultural diversification effort that included the clearing of vast swaths of land in the interior, some of it in the cerrado and some as far inland as the Bolivian border. Among other agricultural products, some of these new lands were appropriate for corn and soybeans, crops normally quite amenable to farmers of a more modest capital base. But the cerrado requires massive inputs before agriculture can be attempted, and the interior lands are often in excess of 1,000 kilometers from Brazil's perennially overworked ports. The twin development and infrastructure costs wound up reinforcing the oligarchic nature of the Brazilian agricultural system to the point that the average "new" Brazilian farm is six times the size of the farms of "old" Brazil.

Second, plantation agriculture calls for unskilled labor, a pattern that continues into the modern day. Unlike the more advanced New World colonies – which enjoyed access to easier transport and thus more capital, yielding the kernels of urbanization, an educational system and labor differentiation – Brazil relied on slave labor. It was the last country in the Western Hemisphere to outlaw slavery, a step it took in 1888.

A lack of skilled labor means, among other things, a smaller middle class and lower internal consumption than other states at a similar level of development. Consequently, Brazil has a small number of landed elite and a large majority of poor. As of 2011, fully one in four Brazilians eke out a living in external pageBrazil's infamous slums, the favelascall_made. According to the Gini coefficient, a sociological measure of income inequality, Brazil has been the most unequal of the world's major states for decades.

Taken together, Brazil faces inflationary barriers at every stage of the growth cycle. Starting a business requires capital, which is in short supply and held by a privileged class. Shipping goods requires scarce infrastructure, which is insufficient to needs, expensive and often owned by a privileged class. Any increase in demand for either of these inputs puts upward pressure on the associated costs. Expanding a business requires skilled labor, but there is not a deep skilled labor pool, so any hiring quickly results in wage spirals. And holding everything back is the still-disconnected nature of the Brazilian cities, so there are few economies of scale. More than anywhere else in the world, growth triggers inflation – which kills growth.

Consequently, Brazil has been characterized by below-average growth and above-average inflation for centuries and thus has traditionally been underindustrialized compared to most other developing states. Even before the oligarchs' interests are factored in, any infrastructure projects that make sense will be linked to projects with good foreign cash-generating potential, which quickly narrows the list of likely projects to agriculture and mining (all commodities are U.S.-dollar denominated).

As such, Brazil has had little choice but to focus on the production or extraction of primary commodities such as sugar and iron ore. Such capital-intensive industries not only reinforce the oligarchic system but also skew the economy's output. As of 2010, fully 70 percent of Brazil's exports are dollar-denominated, with 45 percent of exports by value consisting of raw commodities. This may help Brazil's (dollar-denominated) bottom line, but it does nothing to address its chronic infrastructure, labor, inequality or inflationary restraints.

It is thus unsurprising that Brazil has not yet emerged as a major global power. It cannot economically expand without killing itself with inflation. Its skilled labor pool and capital markets are woefully insufficient for its needs, and the oligarchs have a vested interest in keeping things that way. Even efforts to expand out of the country's various traps have in many ways only entrenched the system. Moreover, what growth Brazil has enjoyed in recent years has been because of the combination of a broad rise in commodity prices and heavy foreign investment into Brazilian infrastructure to get at those commodities, not because of anything Brazil has done.

This hardly means that Brazil is either a failed state or that its past is condemned to be its future. What this does mean is that if Brazil is to rise as a major power something has to change. And two things have changed, in fact: Argentina, and the way Brazilians view their country.

Modern Argentina's decline

Argentina has everything necessary to become a major global power. Its lands are flat and temperate, its rivers are navigable and interconnected, and it enjoys the buffer of distance from major competitors and ample resources to fuel a rise to greatness. Indeed, throughout its first century of independence, Argentina moved from victory to victory – first over Brazil, then Paraguay, and then into the ranks of the world's richest states. Standing in Argentina's shadow, it is no surprise that Brazilians developed the tendency to be humble and passive, unwilling to challenge their rich and dynamic southern neighbor.

In the aftermath of the War of the Triple Alliance, Argentina enjoyed a historic boom. European immigrants arrived en masse, and the opportunities of the Rio de la Plata allowed for the creation and metabolization of massive amounts of capital. Alone among the Latin American states, Argentina generated a substantial middle class. But Argentina had two weaknesses, and from roughly 1930 on, Argentina's trajectory has been downward.

First, unlike in Anglo America, land in Argentina was not widely distributed to individual landholders. Like elsewhere in Latin America, Argentina began with an oligarchic landholder system that left most of the population economically dependent on a small, wealthy elite. A successful backlash to this autocratic structure came in the form of labor unrest that propelled the populist Peron regime to power.

The legacy of Peronism is the enhancement of autocratic power by political mobilization of the lower and middle classes. This power has remained consolidated under the control of external pagea leadercall_made whose authority is unquestioned and whose influence over the institutions of the state is near total. Other institutions are much weaker than the presidency, and as a result, policymaking in Argentina is highly dependent on the individual in power at any given time. Populist demands have overpowered more conventional policies for decades on end, resulting in Argentina's slow and irregular decline for nearly a century.

Second, the vast distance of Argentina from the rest of the world greatly shaped Argentine perceptions. Tucked away at the bottom of the Atlantic, Argentina is one of the world's most sequestered states. Once Brazil and Paraguay had been contained as local threats, the next closest threat to Argentina was the United Kingdom, some 12,000 kilometers away. As in the United States, such large distances allowed a large degree of cultural insulation and national savings. (There was no need to maintain a large standing military.)

But there is a critical difference between the two experiences. The Americans were some 7,000 kilometers closer to potential rivals and thus on occasion were reminded that they are not, in fact, alone. Events such as the 1814 burning of Washington, the European willingness to ignore the Union blockade during the Civil War, the 1941 bombing of Pearl Harbor and, external pagemost recently, 9/11call_made unsurprisingly have had a major impact on the American psyche. Each shocked the Americans out of complacency and spurred them to overreact to the sudden "surprise" that the rest of the world exists. In those subsequent spasms of activity, the Americans remake themselves. This process entails a great deal of disruption in the United States and abroad, but it keeps the Americans adaptable.

Argentina's greater distance from world affairs means that they have suffered no such revivals following intrusions into their geographic utopia. The War of the Triple Alliance is now 140 years past. The war over the Falklands Islands, known to Argentines as the Malvinas, was the one notable instance in which Argentina sought interaction with the outside world. Buenos Aires initiated conflict with a far superior military power – the United Kingdom – and the resulting political and military defeat crushed the standing of the Argentine military, heavily contributing to the decline and fall of the military government. Although the Falklands War had a huge political impact, it did not pose the kind of challenge to Argentine core elements of prosperity that would require a concerted effort at reform and self-renewal. As a result, Argentina has neglected to address national problems that have crept up on it over the decades.

Recent developments underline this tendency. An economic crisis in 2001-2002 placed a new populist government in power that external pagedefaulted on the country's debtcall_made, which freed Buenos Aires of the need to make interest payments. Rather than seize the opportunity to rebalance the Argentine economic and political system onto a sounder footing that leveraged the country's geographic blessings, the state instead spent the savings on mass subsidies to bolster its populist credentials. High growth resulted, but the policies were only paid for by hollowing out the country's capital stock and distorting the economy to the point where fundamental industries – from external pagecattle farmingcall_made to external pagewheat growingcall_made to external pageenergy productioncall_made – have now begun to fail. High taxes combined with high consumption encouraged by large subsidies and price controls have crippled business owners and agriculturalists alike. The subsidies have proved particularly problematic, as they have locked the government into ever-increasing expenditures expressly linked to the populist patronage the people demand as their right. Consequently, Buenos Aires only wields limited influence in South America and little to none beyond the continent.

With all that said, Argentina is still the power in South America with the clearest, most likely growth path. It still holds the Rio de la Plata's river network and it still holds the Pampas, the best farmland in the Southern Hemisphere. What it cannot seem to figure out is how to make use of its favorable position. So long as that remains the case – so long as the natural dominant power of the Southern Cone remains in decline – other powers have at least a chance to emerge. Which brings us back to Brazil.