Difficult to Digest Big Mac

Source: The Economist

The Economist released its latest Big Mac Index Study last weekend and, at least for those in Brazil or with very intensive contact to Brazil, the result is not a surprise. The Big Mac Index, according to the newspaper can be described as follows:

Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

If we apply this to Brazil and look at the chart above, we will see that according to this index, the BRL is overvalued against the USD by ca. 50%. Now this is fairly imprecise, as the Index does not show the relationship to GDP per person. The Economist recognized this and adjusted for GDP per person... and now the BRL seems even more overvalued...

Now I did study economics and although I have been outside of my field for quite a while, I believe that such a strong disconnect (BTW, also for Argentina) implies four things:

1. The Big Mac Index is flawed (not likely),
2. the Brazilian average GDP is set to rise to the level of the USA in a short timeframe (desireable but not likely), or
3. that the BRL is in for a huge devaluation...
4. or inflation within the next few months.

There is of course a further possibility: That the current scenario simply shows a temporary disconnect of several economic factors caused by fear of a destabilization of US and European economies, that several countries are threatened by defaults or at least rating downgrades and a flight to "safe harbors", such as Brazil is occuring.

I find it hard to believe that any of the four... five factors can explain the current scenario - but given the size of the gap I believe we are in for one severe indigestion.

Cooked Inflation

Everybody in South America talks about the understated inflation in Argentina. The government claims it to be 10%, but it most likely is 20+%...

Now I have seen life in Sao Paulo get more expensive over the past months. My unrepresentative list goes like this:

- Club Monthly Fees: 13.6%
- Picanha at my grocer: 45%
- Taxi fare: +28%
- Milk: +8%
- Private School: +12%
- Real estate: Do not even mention it...

Official inflation is only aroung 5-6% but prices have been creeping up beyond, mostly food - possibly a bi-product of commodity inflation. Official numbers are not confirmed at the levels above... yet. With commodity prices soaring all around the world, more is likely to come, but I am worried that there may be much more already here in the country.

My fears have been "confirmed" with two pieces of news I came across recently: This week's Veja magazine, which is running a (non-representative and somewhat populist) special and The Economist, which has compiled a Big Mac implied inflation index. This index puts inflation in Brazil at n+4%, so more around 10%... Keep your eyes and ears open.

EDIT: Where you look, more news. Here from the Brazil Institute.

Top executive salaries are paid in... São Paulo

The Economist, January 27, 2011

This week's The Economist is running an article on a market study on executive pay. In Brazil, specifically, São Paulo, pay is highest, with generous bonuses to boot - coupled with extremely high taxes, this makes hiring executive professionals daunting. Even without the real valorization, São Paulo is an expensive place to hire top-execs, when you get them.

In addition, a befriended Blog (Expat American in Brazil) confirms what I have also noticed: Scarce local labor (especially on a high level) is starting to make an export of labor from other countries an option - in addition to trying to get Brazilian Expats abroad to return to Brazil.

Farm of the Future

Last year, The Economist ran an article on Brazil's "Agricultural Miracle". Hank Pellisier ran a digest of this article and a few others and condensed it in "Brazil: Future Farm of the Planet?".

It's well worth a read. Just to show you some of the potential in this country, here are some facts Hank dug up about Brazil's agricultural ranking:

Chickens: 1st in the world, 41% of export market share
Coffee: 1st in the world, 27% of export market
Orange juice: 1st in the world, 82% of export market
Soybeans: 1st in the world, 38% of export market
Beef: 1st in the world, 26% of export market
Sugar: 1st in the world, 39% of export market
Ethanol: 1st in the world, 52% of export market
Tobacco: 2nd in the world, 17% of export market
Bananas: 2nd in the world, behind India
Pork: 3rd in the world, 15% of export market
Corn: 3rd in the world (behind USA and Argentina)
Black pepper: 3rd in the world (behind Vietnam and Indonesia)
Cotton: 5th in the world (USA is the leader)

A Small Dictatorship in a Democracy

The first time I saw the above flag, I thought of Cuba - but, no: This is the flag of the state of Maranhão (located in the Northeast Region), one of the poorest states in Brazil and with an HDI on par with sub-Saharan Africa. If this were not enough, the state has been under uninterrupted rulership of the Sarney clan for 44 years. José Sarney is a classical old-school "coronel" (in the "traditional" style of politics, the local coronel in alliance with other large farmers, controlled the votes of mostly rural inhabitants. The local political chiefs in turn exchanged votes with state politicians in return for political favors) - in other words, a political situation rife for corruption.

Sarney has been active in the Maranhão state politics since the 1950s as member of the parliament, senator and governor - after leaving office, to become running mate for president of the late Tancredo Neves in 1984, he made sure the state remained under family control and pushed his daughter, Roseana, into government.

He assumed the presidency after the Tancredo Neves passed away on the eve before assuming office in 1985 (surely a great topic for conspiracy theorists). Ms Sarney has just been reelected governor, which does not mean much hope for the Maranhão state and it's people - but at least she states it will be her last time in office.

When the highly polemical (but very enjoyable) biography, "Honorable Bandits" (available in Portuguese) was presented in Maranhão last year, a student group allied to Sarney stormed the building where the book was presented, and attacked the authors. Fortunately nobody was seriously injured. For a more neutral external view, please refer to The Economist article "Where Dinosaurs Still Roam".

Brazilian Elections: "She's the Man"

It still is unclear if Brazil is in for a run-off in the presidential election, where voters line up to (basically) decide, whether they will vote for Dilma Rousseff (depicted on the left), former chief of staff of the immensely popular president Lula from the PT (Worker's Party), or her rival José Serra, former governor of SP state and member of PSDB (Social Democrats). This week's The Economist has an editorial on the election an rightfully states that, unless disaster strikes, Brazil is in for a further four years of PT, albeit without the charm, charisma and popularity of Lula. According to the latest poll, Ms Rousseff, who has never held elected office and has risen through the ranks as a career civil servant, would receive roughly 50% of the vote - an absolute majority would carry her to a victory.

The stellar popularity of Lula, now to be transferred to Dilma, as she is popularly called, is due the reduction of poverty through social measures, but also inheriting and not reversing macroeconomic stabilizing measures from the previous government - or, as The Economist puts it:

"...Lula deserves praise for bringing into the Brazilian mainstream the once-novel idea that reducing poverty is a proper aim of government (though others sneer snobbishly). But when asked what Lula has done for his country, such people also point to the policies he inherited from his predecessor, Fernando Henrique Cardoso." (The Economist, Sep 30, 2010)

But on the sidelines, there are much more interesting things going on. In these elections, not only the future president will be elected, but the upper and lower chambers of the parliament and governor seats are also up for grabs, as are the offices of the state parliaments. On the lower levels, there are the examples of one candidate who appears to qualify for office, because his daughter was brutally murdered a few months ago and has the catchphrase: "Through suffering I have learned to fight - now I am fighting for your vote." 

But there are also two further examples that are at least curious, not to say frightening: The "Mulher Pera" (clicking the link may infringe your corporate IT policy), a starlet with... let's say physical attributes and the circus clown Tiririca (Slogan: "It ain't gonna get worse, than it is") are both running for the lower house of congress in Brasília. Both are candidates for small parties and are so called "Puxadores" (pullers), who are popularly known and thus do not need much marketing. As these candidates will most likely get more votes than they need, the Brazilian electoral system deems that excess votes be passed on to further candidates in their parties - in the case of Tiririca three most likely "pulled candidates" will be career politicians, currently up to their neck in campaign financing scandals and thus would most likely never be elected by popular vote.


These candidates and others are most likely in for their last term in any case - the Lei Ficha Limpa or "Clean Record Act" allows electoral courts to refuse registration of candidates already found guilty by a higher court. However, as this law on recently was pushed through congress and some of the wording is open to interpretation, thousands of appeals will be upheld. Still, today's Estado de Sao Paulo newspaper lists a total of 1248 candidates will not be able to be elected, although they are on the ballot. Of the total of 172 candidates for governor of Brazilian states a total of 15 (!) are in limbo due to pending court decisions.

All in all, even having a clear tally tomorrow evening will not mean that clarity will prevail once once these candidates are supposed to take their elected seats.

Special Economist Cover in Brazil Only?

This is what I got in my mail - and the cover shows up nowhere on the internet. This is not the North American, not the UK, not the Europe and not the APAC cover - is Brazil in for it's own special cover for the election? (Please excuse the poor scan)

P.S. The Economist seems to be pretty sure of itself... and note the title - not "election", but "handover"...

Brazil, to be or not to be.

What I like about the Pearson Publishers, is that they actually manage to have clear, critical and sometimes even contradicting opinions if you look at their two flagship publications, the FT and The Economist.

If we look at a recent The Economist article first, called "Four Reasons to Believe in Brazil", from July, the outlook is outright positive. The highlights are commodities and the global commodity hunger, the second oil (actually also a commodity, but the focus here is on self-subsistency and strategic importance in an increasingly energy-hungry world), demography (i.e. a major amount of people joining the work force and slower birth rates kicking in meaning infrastructure is set for the kids there and more people there to pay for it), and urbanisation, where wages usually are higher and access to education, infrastructure, etc. are much better.

Mr. Wolf from the FT takes on a much more pessimistic view in his June article "Why Brazil must try harder". Commodities also plays a significant role here, but with a highlight that while exports in Brazil have increased, the share of manufactured goods still remains low. This is similar to what I recently heard from a presentation of the Trade Ministry at the São Paulo Chamber of Business. The share of commodities in exports has actually increased. All of this still leaves Brazil at a lower development level, as industry development is not significantly challenged if all you have to do is dig out the stuff and ship it to China.

Most interesting, however, is Mr. Wolf's comparison of Brazil to two other BRICs, China and India. Brazil has lower ratios of trade, savings, exchange-rate ratios and population, and lower growth, meaning that while Brazil may have gained in the world, it has fallen behind China and India in world power over the past decades.

I believe it is exagerated to say, that this means that Brazil will not be of any significance in the future, but Mr. Wolf does have a point - especially if we consider the massive infrastructure needs the country has and the low level of savings, there is something Brazil must do, to catch up.