China – Gaucho’s new best friend

I am writing this post from Montevideo in Uruguay, which is why it will be about…Argentina and Brazil - more specifically, about their economies. In the alphabetical order:

Argentinians remember the last decade of 20^th century with nostalgia - people could easily afford going on holidays to Europe or USA and buying good quality products from abroad was inexpensive. Life was good. Unfortunately, the same reason that seemed to have brought them prosperity was the main cause of the crash at the beginning of this century. In the early 90’s the government decided to tackle high inflation by fixing peso’s exchange rate to the dollar. Indeed, the inflation dropped quite quickly but cheap dollar contributed to significant increase in import, thus negatively impacting local manufacturers – people preferred to buy better quality and cheap foreign goods. However, if you spend more than you make, you need to find ways of financing the deficit. Argentinian government chose the easiest way – through privatisation and increasing already high foreign borrowing. This worked until the beginning of 2002, when Argentina defaulted on part of its debt obligations.

Argentinians lost a lot of money during the crisis - saving deposits were frozen for a year after a run on banks, peso devalued strongly. Unemployment and poverty levels rose significantly. Fortunately, the recovery came quite quickly, aided by high prices of commodities (e.g. soya beans) as well as weak peso – good for bringing tourists and for exports. In the recent few years Argentina has enjoyed a +5% annual GDP growth rate, but the overall picture is still far from being rosy. Growth brought high inflation –officially at just below 10%, independent estimates suggest it is actually three times higher. What is worse, the inflation would have been much higher had the government decided to put real prices on public services such as gas or public transportation. These subsidies are however a political hot potato and although unfair and costing the budget a lot of money, nothing will be done before October elections.

The bigger problem is of a structural nature - the growth has been largely due to high commodity prices and there is a need for reforms to build stronger foundations. Currently, abundance of red tape and numerous government interventions do not encourage investments. The other serious problem is scarcity of external funding – after the default on payments, Argentina has only recently managed to get access to international debt markets. Argentinian debts is however still graded below investment level, which makes any borrowing very expensive. The government still needs money to finance deficit, so instead of borrowing from abroad, it is increasing internal debt by raiding a state pension fund. Apparently it has too much money – if this is true, it is probably the only such case in the world. There is however someone a light in the tunnel. China, unaffected by the default, is happy to lend money on reasonable terms as well as invest - all as long as Argentinian commodities find their way to satisfy Chinese growth first.

China, through its appetite for commodities, has also contributed to the growth of neighbouring Brazil. However, Brazilians owe much more to good governance. Continuing sound macroeconomic policies of his predecessors, leftist government of the former trade union leader Luis Inacio Lula da Silva, has managed to increase competitiveness of the economy, reduce poverty (successful Bolsa Familia programme) and grow GDP at respectable and sustainable rate. In addition, unemployment of c.6% can only be looked at with envy by the Europeans.

Brazil, one of the four main emerging economies (so called BRICs), is also a world leader in ethanol production and home to world class companies in aerospace and mining. Its recent good fortunes seem never-ending – not only have they been granted the right to organise the World Cup (2014) and Olympic Games (2016), but they have also discovered one of the world’s largest new offshore oil and gas reserves, located 250 km from Rio de Janeiro.

How about Uruguay? Having two large growing economies across the border can only be a good thing. You just need to elect the right people to take advantage of this. 

Rainbow nation

The term Rainbow Nation was coined by Archbishop Desmond Tutu and then famously used by Nelson Mandela, who wanted to highlight a positive side of South African cultural diversity in order to unify the nation – an extremely difficult task after the end of apartheid.

I think the term is also a very fitting description of Brazilians and I do not just mean colourful outfits of samba dancers. With skin colours in all shades from northern European white to African black, this is a country where no (non-Asian looking) person will look alien. As a consequence, such diversity should mean the country does not have a problem of racism – in a world where everyone around looks slightly different, skin colour should not be an issue. Here is why:

The source of racism (apart from specific historical reasons like slavery) has to do with two things: the way our brain works and our ignorance. First, the brain: when we hear a piece of new information we like to put it in a context (why, when, where, etc.) – this facilitates memorising. As a result, we tend to remember better the information that already nicely fits the context and easier forget one that does not. If we are lucky the news will be accompanied by in-depth analysis by a well informed and communicative specialist in the field. Let’s face it, it only happens when we read good quality newspapers/magazines like The Economist. Rest of the news that hit us every day are in a raw and, often confusing, format, but our brain will still make an attempt to contextualise it. The problem is that it is unable to analyse profoundly every information, unless we make a conscious effort to do so. If we do not, it will grab the most simple explanation, using the available contexts.

Another thing worth noting is that we like to think nice things about ourselves and see negatives mainly in others. How many people really welcome criticism?

Now, minding the above - take this example: if we are white and see a black criminal on the news being handcuffed by police, the first thing we notice about him and the lens through which we will subconsciously look at him is the colour of his skin - this is quite obvious main difference between the two: we – clearly a nice person and the criminal – clearly a bad guy. This is a context. If he is white, we are more likely to think first about his social background, lack of education or bad role models in his youth - any obvious differentiator from us and, incidentally, another context.

The example above nicely leads to the issue of ignorance or, in many cases, simple lack of relevant knowledge or experience. If we have no previous experiences with black people, the context “black criminal” is created without any internal conflict against other contexts. However, if we have a black neighbour, colleague at work or even a friendly shop-assistant from local convenience store, our experiences with those people are likely to already be a separate context and the two will now clash. The strongest context (i.e. the one with more information) should then win.

Coming back to Brazil – if you have all colours of rainbow around you all the time, the rainbow itself will not be something you notice any more. Wouldn’t it be nice if all people were colour-blind?

PS. I have already written in this blog about how our brain loses against our gut, in response to the worldwide panic following Japan’s earthquake and its effects on the nuclear reactor in Fukushima. You can find it here.