Should South Africa get a Brazilian ... model ... of business?

As recently as 2007, Brooke Unger at The Economist posed the question, “Brazil is big, democratic, stable and rich in resources.  So why is it not doing a lot better?”

With a population of almost 200 million, its economic growth rate - at 3.3% - felt anaemic next to other emerging markets.  Yet Brazil was also one of the last big countries to enter recession during the credit crisis and the first of the G20 nations out of it. From having one of the most economically unequal societies in the world they are now right about average.

Brazil used to be a by-word for regular political upheaval, grinding poverty, state-intervention in all parts of the economy and brutal suppression of human rights in support of its wealthy and cosmopolitan ruling elite.  In other words, not very different from South Africa.

In the 1990s, after a period of hyperinflation of Zimbabwean proportions had entirely wrecked the economy, the government stabilised.  The Central Bank was given independence with a mandate to keep inflation low and ensure the stability of local banks.  The economy was opened to outsiders and state industries privatised.

World-beating firms emerged, like Embraer, an aircraft-manufacturer, Gerdau, a steelmaker, and JBS, one of the world’s largest meat producers.  Corruption abounds but unemployment is low and social services act to engage beneficiaries in the economy.

Again, not particularly different from South Africa after 1994.

So why is Brazil doing so much better than South Africa and, as expounded by President Jacob Zuma, could South Africa benefit from adopting a Brazilian model of economic development?

South Africa too has its world-beating firms; in healthcare, consumer goods and mining.  South Africa has a stable democracy, albeit corrupt, and a large population.  South Africa too has a base in commodities extraction to support state expenditure.  What is South Africa doing differently that isn’t working?

For starters, there is the accident of geography.  Brazil is close to the US and situated amidst a number of nations all of middle-income status.  South Africa’s neighbourhood is impoverished and of puny market value.  Infrastructure between sub-Saharan African nations is non-existent and only a few companies have managed to benefit from such links.

South Africa’s lukewarm approach to supporting democracy in Zimbabwe has destroyed an important trading partner and diminished the opportunity for economic growth throughout the region.

But there are other things too.  Brazil has a diverse economy, balanced between local exporters and foreign investment, as well as local production and imports.  They will host the FIFA World Cup in 2014, and the Olympics in 2016.

Brazil has an energetic informal sector trading in locally-produced goods that emerge from small-scale farmers and manufacturers.  South Africa’s informal sector, while active, is not a producer.  It is a net importer of low-cost Asian goods.  Brazil manages to be a net exporter to China.

The reasons for the limited success of South Africa’s informal sector are mostly political.  Labour unions regard low-paid, unprotected work as diminishing their political influence and ensure ever-tighter rules that increase the costs of informal production.  Without such a bed-rock of micro-industry the poor are even more reliant on social services.  Which aren't working.

In addition, politics interferes with all levels of business investment.  The private healthcare industry, which could be a massive source of revenue from both foreigners and locals, is limited by rules around new hospital construction.  All businesses are limited by their ability to employ, and be owned by, the “appropriate” racial profile of politically-connected individuals.

What this has done has resulted in an economy overly-reliant on a narrow range of companies and industries which invest more in labour-saving systems than in employment. 

Brazil is not perfect.  Too many fruity rules exist that complicate employment and investment.  Corruption and violent crime is a festering sore.

Its success proves that things don’t have to be perfect to start working.