(Part Four)

Modern Brazil's success

Brazil's challenges are legion, but at core they are as simple as these two issues: Brazil's geography works against it, and its economy is trapped by inflation. The Brazilians have spent decades struggling against these two facts, and in the past generation they have finally achieved significant progress.

Brazil's struggle with geography

As discussed, Brazil's core coastal territories present the country with a variety of difficulties that no amount of local development can overcome. Yet Brazil does sport a broad swath of arable land in its interior which is flatter, more temperate and largely unified topographically – the trick is uniting the coastal territories on the east side of the Grand Escarpment with the interior in a way that does not undermine the authority of the state. From the 1870s until the 1980s Brazilian development strategy therefore was relatively straightforward: expand the country's infrastructure, kilometer by painstaking kilometer, into those interior arable zones. The sheer size of the territories that could be put under plow partially overcame the inflationary and transport bottlenecks that limited Brazil's core coastal regions.

While early expansion certainly weakened central authority by encouraging economic links to Argentina, as that expansion built upon itself and developed economies of scale, interior Brazil became a formidable economic engine in and of itself. And while Brazil's gaze still lingered on the attractiveness of the Rio de la Plata's transport network, Brazil was sizable enough to have independent economic heft. Under those circumstances, association with coastal Brazil was an economic complication rather than an economic catastrophe.

By the 1970s several interlocking factors started solidifying the many interior success stories:

• Argentina's deepening malaise lessened the attractiveness of the Rio de la Plata's rivers.
• Brazil finally cleared enough interior lands so that more easily shippable conventional cereals were starting to be produced in large quantities, producing a more positive value-bulk ratio in the transport of Brazilian agricultural produce that somewhat eased its transport problem.
• Brazil's interior expansion took it right up to the borders of Bolivia, Paraguay and Uruguay, and after some tentative moments, Brazilian infrastructure and capital started moving across the borders and integrating the agricultural lands of the border states into the broader Brazilian economy. Argentina did little to resist. Bit by bit Argentina lost influence in the three states and by 2011 all three have become de facto Brazilian economic satellites.
• Foreign investors saw sufficient potential in the Brazilian interior that they were willing to invest increasing sums of their own capital in underwriting both the country's interior development projects and its efforts to assimilate the three border states.

Surprisingly, the clear-cutting of the interior provided the basis of Brazilian political liberalization. One of the many downsides of an oligarchic economic system is that politics tend to become as concentrated as wealth. Yet in clearing the land Brazil created artificial trade ways – roads – that allowed some Brazilians to strike out on their own (though they were not as efficient as rivers). Currently there are some 2.6 million landholders with farms of between 5 and 100 acres (anything less is a subsistence farm, while anything more verges into the category of high-capital factory farms). That is 2.6 million families who have a somewhat independent economic – and political – existence. Elsewhere in the world, that is known as a middle class. The environmental price was steep, but without this very new class of landholder, Brazilian democracy would be on fairly shaky ground.

The interior expansion effort solved none of the coastal bottleneck issues, but the constellation of forces certainly conspired to ease Brazil's path. But perhaps the most important aspect of this interior push was that Brazil ceased to be simply a geographic concept. The rising importance of the interior – best symbolized by the relocation of the political capital to the interior city of Brasilia in 1960 – diluted the regional leanings of the coastal cities. The lands of the interior saw themselves first and foremost as Brazilian, and as that identity slowly gained credence, the government finally achieved sufficient gravitas and respect to begin addressing the country's other major challenge.

Inflation

No economic strategy can allow Brazil to achieve the magic mix of locally determined, strong growth with low inflation. At most, Brazil can have two of the three. For most of the 20th century, Brazilian governments tended to favor growth as a means of containing social unrest and mustering resources for the government, even at the cost of inflation. But since inflation tends disproportionately to harm the poor, the already-wide income gap between the oligarchs and the rest of the population only widened. Since 2006, strong global commodity prices have external pageallowed the Brazilian economy to grow fairly rapidlycall_made, but those commodity prices are based on factors wholly beyond Brazil's control. As with every other commodity cycle, this one, too, will come to an end, triggering all the economic dislocation with which Brazilians are all too familiar.

Unless of course, the government changes the game – which it has done.

The macroeconomic strategy of the current regime, along with that of a string of governments going back to the early 1990s, is known colloquially as the "real plan" (after Brazil's currency, the real). In essence, the strategy turned Brazil's traditional strategy of growth at any cost on its head, seeking instead low inflation at any cost. Subsidies were eliminated wholesale across the economy, working from the understanding that consumption triggered inflation. Credit – whether government or private, domestic or foreign – was greatly restricted, working from the assumption that the Brazilian system could not handle the subsequent growth without stoking inflation. Government spending was greatly reduced and deficit spending largely phased out on the understanding that all forms of stimulus should be minimized to avoid inflation.

In practice, this led to a series of policies that most economists interpreted as rather orthodox, consisting of extremely low government debt; extremely restrained government activity; and extremely well capitalized, heavily regulated and conservative banks. These strict inflation control policies have achieved a high degree of economic stability. Inflation plunged from more than 2,000 percent a year to the single digits. But those gains came at a cost: Between 1980 and 2005, Brazil has shifted from one of the world's fastest growing economies with one of the highest inflation rates to one of the lowest inflation economies with one of the lowest (if somewhat irregular) growth rates.

But the real plan is not an orthodox economic policy. Economic orthodoxy stems from the belief that constrained credit, limited government and low inflation are policy tools designed to maximize growth. Orthodox policies are means to an end. The real plan approaches the question from the other side, in which strong growth is the enemy because it causes runaway inflation that destroys economic, political and social stability. As such, constrained credit, limited government and low inflation are the goals of the real plan, not the means. The distinction is sufficiently critical to bear repeating: Growth is the enemy of the real plan, not its goal.

What results is not so much a difference between perception and reality but between what the Brazilian government intended and what the international markets perceive those intentions to be. Investors across the world believe the real plan's ends are in actuality its means – and they interpret those ends as being in perfect sync with their interests. Thus, foreign investors have been voting for Brazil and the real plan with their money. Inward investment to Brazil is at historical highs, with the Brazilian Central Bank projecting the country's 2011 foreign direct investment take at a stunning $60 billion.

All this money is working against the real plan's goals: introducing credit where the government seeks to constrain credit, overfunding banks that the government wants to keep tightly regulated, encouraging spending that the government deems dangerous. Brazilians may be feeling richer because of the cheap, imported credit, but for government planners the environment is becoming ever more dangerous, threatening the hard-won stability that the real plan seeks to sustain. At the time of this writing, annualized inflation has edged up to 6 percent, right at the government's redline.

The true success of the real plan lies in achieving economic stability and, most of all, control. Brazil's geographic and social challenges are daunting, and no government could hope to address them competently if it could not first master local macroeconomic forces. In this, the real plan has performed to design. While hardly dead, inflation is restrained – and that has given the government space to start addressing the myriad other issues the country faces.

As with the interior expansion plan, the success of the real plan has changed how Brazilians feel about their country. When inflation burned through poor citizens' savings, when it destroyed livelihoods and condemned tens of millions to lives of poverty, faith in central institutions was lacking. The real plan may not promise great growth or even great wealth, but it has delivered price stability – and with price stability people can lay at least a limited groundwork for their own futures. Savings holds value from year to year. Purchasing power is constant. These are basic economic factors that most of the developed world takes for granted but which are relatively new to the current generation of Brazilians – and Brazilians rightly credit their central government with achieving them.

Just as the interior expansion effort provided all of the Brazilian states with a vested political interest in the Brazil project, the real plan has provided all of the Brazilian states with a vested economic interest in the central government. It is not so much that the real plan removed the structural and geographic causes of Brazil's inflation problem – which is impossible to do – but it proved to Brazilians that their country could be economically stable and that their government could act in the interests of Brazil in its totality rather than simply for whichever state happened to hold the presidency at the time.

Brazil's geopolitical imperatives

Geopolitical imperatives are broad, strategic goals a country must pursue if it is to achieve security and success. These are non-ideological paths determined by the geography of a given country and by the geography of its neighbors. Geopolitical imperatives typically nest: The second imperative is dependent upon the first imperative, the third upon the second, and so on. This is not the case for Brazil, however.

Since Brazil occupies such a difficult geography, it has traditionally been a weak state that has lacked the resources and institutional capacity to greatly impact the world around it. Its first three imperatives reflect this. As such, the order in which those imperatives might be attained is largely determined by the constellation of forces in Brazil's near abroad – factors for the most part beyond the Brazilians' ability to manipulate – rather than any decision-making process in Brasilia. Brazil can only push to achieve these imperatives as circumstances beyond its control allow.

Imperative one: protect the coast

The Brazilian southern coast contains the country's core territories. However, the ruggedness of that coast and the disconnected enclave nature of the core territories mean that infrastructure linking the coastal territories will not ensure mutual defense. The only way Brazil can protect its core itself is to cultivate a naval force of sufficient strength to deter would-be predatory powers. Without such a navy, Brazil would shatter into a series of (most likely mutually hostile) city-states. And without a navy any Brazilian exports are utterly at the mercy of more maritime-oriented entities.

But Brazil is capital poor and cannot afford such a navy. Historically, this has led Brasilia to seek alliances with whatever the dominant Atlantic power has happened to be in order to hold the traditionally more powerful Argentina in check. In the first half of the 19th century, the Brazilians sought out a favorable relationship with the British. But the deeper expression of this imperative came from Brazil's enthusiastic embracing of the United States' Monroe Doctrine. Nearly alone among Western Hemispheric powers, Brazil expressed enthusiasm for the American neo-colonial policy of barring European states from the Western Hemisphere, largely because it could not stand up to those powers without assistance.

Even today, external pageBrazil's navy is unable to patrol the Brazilian coastlinecall_made reliably beyond the Brazilian core territories. Thus, Brazil maintains close – if not exactly friendly – relations with the United States both to ensure that America never views Brazil as a state of concern and as a hedge against other potential threats.

Imperative two: selectively expand into the interior

Developing (or outsourcing) a navy is one means of protecting Brazil's core. Another is to expand that core into new areas not so exposed to a hostile navy. In this, Brazil faces several challenges. The coastal enclaves are not large enough to generate their own economies of scale, so reaching inland requires the expenditure of massive resources Brazil simply does not have. As such, Brazil's inland expansion has been halting, slow and piecemeal and driven by an often badly coordinated mix of government, oligarchic and foreign interests. The obvious target for this expansion is into the subtropical and temperate regions of the country's south, not the tropical zone of the north.

However, the farther these new territories are from the coast, the more integrated they will naturally become into the capital-rich lands of the Rio de la Plata region to the south. Ironically, in achieving strategic depth and a better economic position, Brazil risks its territory becoming more fully integrated into its neighbors, as opposed to the Brazilian core.

In this challenge, however, also lies an opportunity. When the economies and populations of Brazil's interior regions are small, they naturally gravitate toward Argentina's sphere of influence. But as they grow they eventually reach a critical mass in terms of influence, which brings us to the third imperative.

Imperative three: expand into the Rio de la Plata region

The solution lies in increasing Brazilian influence to the south so that those territories ultimately answer to Brazilian economic and political decision-making. Like the first two imperatives, this requires decades of slow efforts to make any progress. It has only been in the past generation that Brazil has created enough capital to encroach into the Argentine-Brazilian buffer states of Bolivia, Paraguay and Uruguay. Brazil has invested heavily into Bolivian energy and agriculture. Most Bolivian foodstuffs are now sold to or through Brazil to the outside world. Natural gas – responsible for external pageby far the largest component of Bolivian state incomecall_made – is under the direct management of Brazilian state-owned energy company Petroleos Brasileiros (Petrobras). In Paraguay, Brazilians have migrated in significant numbers and are the dominant investors in the economy – particularly in electricity, as the two are partners in the Itaipu Dam. Brazilian (and Argentine) cash fuels Uruguay's vibrant financial sector, and Brazilian-born Uruguayan citizens now own a majority of Uruguay's farmland.

The next logical question – something the normally nonconfrontational Brazilians are currently struggling with – is what to do once economic control has been seized but political control is not yet in place. Here the Brazilians come up against an odd cultural barrier: Nonconfrontation is hardwired into the Brazilian psyche. Even today, with the Brazilian economy growing and Argentina continuing to struggle, there exists a belief in government circles that Brazil needs to concentrate on striking an equilibrium with Argentina, with perhaps the inclusion of even Chile in a trilateral balance of power in the region (the Chileans for their part want little to do with the Southern Cone and even less to do with the Argentine-Brazilian balance of power).

For all practical purposes, Brazil has already secured dominance in the three buffer states – Uruguay, Bolivia and Paraguay are all but economic satellites of Brazil – but in light of Brazil's historically passive foreign policy these states rarely shirk from demanding better terms out of Brasilia. Uruguay charges steep fees on Brazilian cargo. Paraguay recently was able to triple the cost of electricity produced by the Itaipu Dam, Brazil's single-largest source of electricity, and routinely receives financial aid from Brazil and Mercosur. The Bolivian government regularly confronts Medialuna landowners who for all intents and purposes are fully integrated into the Brazilian economy, and it has not been shy about its attempts to nationalize energy assets owned by Brazilian interests. If Brazil is going to make its gains stick, at some point it will need to devise a strategy for formalizing its control of the buffer states. That means, among other things, learning to be less accommodating.

There also looms a much more significant – potentially bruising – competition. Brazil cannot be truly secure until at the very least it controls the northern shore of the Rio de la Plata. That requires significant penetration into Paraguay and de facto control of Uruguay and of select pieces of northern Argentina. Were that to happen, Brazil's interior would have direct access to one of the world's most capital-rich regions. The marriage of such capital generation capacity to Brazil's pre-existing bulk will instantly transform Brazil into a power with global potential.

But not before. Without these territories, the Southern Cone balance of power remains in place no matter how weak Argentina becomes. So long as Argentina can exercise functional independence, it persists as a possible direct threat to Brazil, constrains Brazil's ability to generate its own capital and exists as a potential ally of extraregional powers that might seek to limit Brazil's rise.

Imperative four: challenge the dominant Atlantic power

Should Brazil manage to consolidate control over the Rio de la Plata basin the game changes greatly. At this point Brazil is no longer a vulnerable, enclave-based state facing extreme challenges to its development. Instead, Brazil would control the majority of the continent and command broad swaths of easily developed arable land. Instead of cowering in fear of regional naval powers, it would be the dominant regional naval power. With that transformation, Brazil would not see extraregional navies as friends protecting it from Argentina but as enemies seeking to constrain its rise.

Obviously, this imperative will be well beyond Brazil's reach for many decades. Not only is Brazil's navy far smaller than that of states with one-third its population, it is nowhere close to commanding the Rio de la Plata region. Until that happens, Brazil has no choice but to align with whatever the Atlantic's dominant power happens to be. To do otherwise would risk the country's exports and its overall economic and political coherence.