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Brazil’s economy The devil in the deep-sea oil Unless the government restrains itself, an oil boom risks feeding Brazil’s vices Nov 5th 2011 | from the print edition DEEP in the South Atlantic, a vast industrial operation is under way that Brazil’s leaders say will turn their country into an oil power by the end of this decade. If the ambitious plans of Petrobras, the national oil company, come to fruition, by 2020 Brazil will be producing 5m barrels per day, much of it from new offshore fields. That might make Brazil a top-five source of oil (see article). Managed wisely, this boom has the potential to do great good. Brazil’s president, Dilma Rousseff, wants to use the oil money to pay for better education, health and infrastructure. She also wants to use the new fields to create a world-beating oil-services industry. But the bonanza also risks feeding some Brazilian vices: a spendthrift and corrupt political system; an over-mighty state and over-protected domestic market; and neglect of the virtues of saving, investment and training. So it is worrying that there is far more debate in Brazil about how to spend the oil money than about how to develop the fields. If Brazil’s economy is to benefit from oil, rather than be dominated by it, a big chunk of the proceeds should be saved offshore and used to offset future recessions. But the more immediate risks lie in how the oil is extracted. The government has established a complicated legal framework for the fields. It has vested their ownership in Pré-Sal Petróleo, a new state body whose job is merely to collect and spend the oil money. It has granted an operating monopoly to Petrobras (although the company can strike production-sharing agreements with private partners). The rationale was that, since everyone now knows where the oil is, the lion’s share of the profits should go to the nation. But this glides over the complexity in developing fields that lie up to 300km (190 miles) offshore, beneath 2km of water and up to 5km of salt and rock. To develop the new fields, and build onshore facilities including refineries, Petrobras plans to invest $45 billion a year for the next five years, the largest investment programme of any oil firm in the world. That is too much, too soon, both for Petrobras and for Brazil—especially because the government has decreed that a large proportion of the necessary equipment and supplies be produced at home. How to be Norway, not Venezuela By demanding so much local content, the government may in fact be favouring some of the leading foreign oil-service companies. Many would have set up in Brazil anyway; now, with less price competition from abroad, they will find it easier to charge over the odds. Seeking to ramp up production so fast, and relying so heavily on local supplies, also risks starving non-oil businesses of capital and skilled labour (which is in desperately short supply). Oil money is already helping to drive up Brazil’s currency, the real, hurting manufacturers struggling with high taxes and poor infrastructure. When it comes to oil, striking the right balance between the state and the private sector, and between national content and foreign expertise, is notoriously tricky. But it can be done. To kick-start an oil-services industry, Norway calibrated its national-content rules realistically in scope and duration, required foreign suppliers to work closely with local firms and forced Statoil, its national oil company, to bid against rivals to develop fields. Above all, it invested in training the workforce. But Brazilians need only to look at Mexico’s Pemex to see the politicised bloat that can follow an oil boom—or at Venezuela to see how oil can corrupt a country. Petrobras is not Pemex. Thanks to a meritocratic culture, and the discipline of having some of its stock traded, Petrobras is a leader in deep-sea oil. But operating as a monopolist is a poor way to maintain that edge. Happily, too, Brazil is not Venezuela. Its leaders can prove it by changing the rules to be more Norwegian.
[MAPS]https://maps.google.ca/maps?q=Pernambuco&hl=en&sll=45.495362,-73.568761&sspn=0.001608,0.004128&t=h&hnear=Pernambuco,+Brazil&z=7[/MAPS] Brazil’s north-east: The Pernambuco model Eduardo Campos is both modern manager and old-fashioned political boss. His success in developing his state may make him his country’s next president Oct 27th 2012 | RECIFE | from the print edition IN THE 1980s an American anthropologist, Nancy Scheper-Hughes, carried out fieldwork in Timbaúba, a town in the sugar belt of Pernambuco state, in Brazil’s north-east. She described a place seemingly resigned to absolute poverty. The back-breaking task of cutting sugar cane by machete provided ill-paid work for only a few months of the year. The deaths of young children from disease and hunger were accepted “without weeping”. Traces of that bitter world survive in Timbaúba. In Alto do Cruzeiro, a poor suburb on a hilltop overlooking the town, Severina da Silva, a maid who also runs a shop in her living room, says that some people still go hungry. She is 48 but looks 20 years older. A 31-year-old cane cutter nicknamed “Bill” has six children—a throwback to the days when people had big families instead of pensions. But Bill has a labour contract, with full rights; he gets a stipend and a small plot from the state government to see him through the idle months. That is part of a broader social safety net provided by democracy in Brazil. It includes non-contributory pensions for rural workers. Some 6,000 of the town’s poorest residents take part in Bolsa Família, a cash-transfer scheme started by Luiz Inácio Lula da Silva, Brazil’s president from 2003-10, who was born near Timbaúba. Thanks partly to this cash injection, the town now boasts car and motorbike dealers, new shops, a bank and restaurants. That is a ripple from a broader flood of investment that has made Pernambuco one of Brazil’s fastest-growing states. Once Europe’s most lucrative Atlantic colony, it languished for centuries. While sugar estates on the plains of São Paulo mechanised with world-beating efficiency, those in Pernambuco’s rolling hills struggled. Revival began with a new port at Suape, south of Recife. Its hinterland is now a sprawling industrial complex. Some 40,000 workers are building a vast oil refinery and petrochemical plants for Petrobras, the state-controlled oil company. A new shipyard and wind-power plants rise among the mangroves. Suape is a monument to federal money, industrial policy and an alliance between Lula and Eduardo Campos, Pernambuco’s ambitious governor. But the state’s boom goes wider. Rising incomes have helped Mr Campos attract private investment. Fiat is to start work on a car plant beside the main road north of Recife. A host of smaller food, textile and shoe factories are now setting up in the state’s poor interior, including Timbaúba. While the rest of Brazil worries about deindustrialisation, Pernambuco does not: since Mr Campos became governor in 2007, industry’s share of the state’s economy has risen from 20% to 25%, and will reach 30% by 2015, he says. This boom has brought nearly full employment—and created an acute skills shortage. The refinery is years behind schedule, as is the shipyard’s order book, partly because illiterate former cane-cutters make poor welders. To try to remedy that, Mr Campos has teamed up with the Institute for Co-Responsibility in Education (ICE), a private educational foundation, to reform the state’s middle schools. More than 200 of these now operate an eight-hour day, rather than the four-hour shifts common in Brazil. In return, the government has raised teachers’ salaries and added bonuses tied to results. It is also trying to chivvy mayors into improving primary schools through extra funds and other incentives. That is vital: on average, pupils arrive in middle schools aged 15 with a three-year learning deficit, says Marcos Magalhães, ICE’s founder. Pernambuco is rising up the rankings of state educational performance. Mr Campos’s critics say he should do more to tackle poverty. Alongside the opulent residential blocks towering over its palm-fringed beaches, Recife has 600 favelas (slums), and its lagoons are fetid with untreated sewage. He replies that his government is doing what it can to help the generation scarred by the poverty of cane-cutting, particularly in the drought-stricken semi-desert region farther inland. But his bold bet is that infrastructure, private investment and better education will eliminate the causes of his state’s misery. “We are turning off the flow of poverty while looking after the stock,” he says, using his trademark management-speak. So far that bet has paid off. Mr Campos won a second term in 2010, and his Brazilian Socialist Party did well in this month’s municipal elections, in Pernambuco and beyond. He is nominally an ally of Dilma Rousseff, Lula’s successor as president. But he is also a potential threat to her winning a second term at the 2014 election. Mr Campos was born into politics. Miguel Arraes, his grandfather, was an old-fashioned socialist and Pernambuco’s governor both before and after Brazil’s 1964- 85 military dictatorship. Mr Campos says Arraes taught him that politics is about “bringing people together, rather than dividing them.” Some in Recife complain that he has learned that lesson too well and become a modern version of a traditional north-eastern coronel (political boss), shrinking from challenging the old rural order, trading support for jobs and favours and freezing out dissenters. But his defenders say he gets things done. He was lucky that his less-heralded predecessor laid the foundations of Pernambuco’s renaissance. He has built on them by modernising the state. He faced down the trade unions over school reform and brought private managers to state hospitals. He has set hundreds of targets for his administration, and harries his aides to achieve them. One that he recognises he must meet—or pay a political price—is to finish a new football stadium in Recife in time for next year’s warm-up tournament for the 2014 World Cup. As both the main parties that have run Brazil since 1995 lack new faces, Mr Campos’s success in Pernambuco has turned him into the country’s most-watched politician. http://www.economist.com/news/americas/21565227-eduardo-campos-both-modern-manager-and-old-fashioned-political-boss-his-success