The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil – Part 4

    Brazil ethanol sold at gas stations

    Brazil ethanol sold at gas stations

    Brazil’s unique resource is not oil, or ethanol – it is its vast supply of
    freshwater. Brazil will be in a unique position in decades to come and it should
    use this strategic advantage to connect with a partner such as China that can
    help Brazil regarding its goal of achieving economic development, growth, and
    prosperity.

    Brazil’s valuable resource (freshwater) will become even more valuable in the coming years as more and more countries are forced to reevaluate their national policies regarding their freshwater resources and that will affect the price and availability of agricultural products around the world.


    Based on the mutual economic development and strategic self-interest of both countries it makes a lot of sense for China and Brazil to go forward and turn into reality the economic plan that I proposed in this four-part series of articles.


    It will be imperative that China find a reliable source of food supply outside China to complement its internal food production for them to be able to feed the Chinese population in future years. And if you look around the world it is obvious that China does not have too many options available to them.


    It will be a smart move for China to secure as soon as possible this food supply from Brazil to feed the Chinese population in the coming decades. The time for China to act is now, and not when there is a crisis and a shortage in the food supply chain around the world.


    A New Paradigm for Direct Investment


    As I mentioned in part-2 of this series of articles, Brazil should create a Brazilian government agency to handle this project in partnership with the Chinese Sovereign Wealth Fund that would supply the money to be invested in Brazil.


    The agreement between both countries would include a process of transparency and accountability regarding the entire plan. And every three years the people from both countries who were responsible for these projects would make a complete review of the projects and would fine-tune each individual project at that time according to the latest needs.


    The projects can’t be placed in a straight jacket; they must be designed with room for future adjustments to be made regarding changes in technology, and demand requirements for each individual project.


    Many people would say this set up is no good – it is central planning – let the free marketplace and Wall Street decide where this money should be invested. My response to these people is: the free market and Wall Street do not have such a good track record as you think when we look closely. If you don’t know what I am talking about I will refresh your memory for you.


    Basically, you don’t have to look further than the savings and loans crisis of the 1980’s that cost over US$ 200 billion in taxpayer money to clean that mess. Then we had Enron, WorldCom, Adelphia Communications, Global Crossing, Citibank, Tyco, mutual fund industry scandal, the hedge fund industry scandal, Halliburton scandal and so on….


    Another example: for years, an overvalued financial market built on misleading and false information sent highly misleading signals to investors who eventually lost trillions of valuable national savings, which were misallocated to unneeded and wasteful investments; as a result investors lost over US$ 2 trillion in the telecommunications industry and over US$ 1 trillion in the dot.com fiasco.


    I know that greed is getting completely out of control in the United States; just look at the latest subprime scandal and the mess that these guys created not only in the United States but also in the major financial markets around the world.


    On the other hand, I can give two major examples to support my case for direct government investment from China to Brazil.


    First Regarding China


    China is doing a superb job in creating new infrastructure and super cities around China to accommodate the country’s rapid urbanization resulting in many new cities in China that one has never heard of that have populations of 6, 7 or 8 million people.


    The Chinese can also help Brazil with the knowledge that they have been acquiring regarding their experience in economic development that has been happening in China on such an extraordinary scale.


    Second Regarding Brazil


    Regarding the development of Brazil’s ethanol industry over the last 30 years, Brazil did not fix its energy problem based on free market solutions. If Brazil were waiting for the free market to fix its dependence on imported oil, then Brazil still would be a slave to that market today in the same manner as the United States.


    Who had the foresight to fix that problem in Brazil?


    The generals did it in the mid 1970’s when we had that major global oil crisis. Brazil had a dictatorship at that time and the generals decided that Brazil was going to fix that problem and they put in place all the rules, regulations and incentives necessary to develop ethanol production on a large scale in Brazil.


    Brazil was able to develop an ethanol industry based on sugar cane, and its vast distribution system network, because of Brazilian government planning followed by the actual implementation of such plan.


    The US is supposed to be a free market economy – but is the free market smart?


    I don’t think so – and you don’t have to look any further than the ethanol production in the United States – from corn. Besides, the free market usually is good for short-term solutions and not so good for achieving long-term goals.


    There are many reasons why it is hard to replicate in most countries the very successful Brazilian ethanol production and distribution system. First, you need all the elements necessary to create such a system including the right climate, type of soil, the availability of freshwater, and so on… Second, it requires a dictatorship type of government, as Brazil had for many years, for a central government to be able to formulate the energy policies, develop a plan, and follow up with its implementation all the way to a successful completion.


    Without the dictatorship in Brazil, and the generals imposing the rules to develop such an energy solution for the country, today Brazil would be in the same energy mess that the United States is going through – the US is highly dependent on foreign sources of oil. (The US depends on imported oil from the most unstable areas of the world including the Middle East, Nigeria, Venezuela, and so on…)


    It is hard for government intervention to work in most cases. For example: In Brazil the generals designed the right policies with the right incentives to transform the energy market in Brazil. It took 30 years for them to refine the system and get to the point that they are today – it took a lot of hard work to develop the state-of-the-art system that Brazil has and other countries around the world want to copy.


    Brazil got lucky and it was able to place the right policies to develop an effective energy system network based on ethanol made of sugar cane. The United States had the chance to develop a similar energy solution, but the US free market system chose the wrong path instead – they decided to develop ethanol from corn.


    Here is an actual example of the free market making the wrong choice – one country makes the right decision under government planning and implementation, and the other country makes the wrong choice under a free market system.


    The American system is in shambles and it does not have a prayer to get any better because of the way the free market works – the oil companies don’t want to give up their monopoly position and they will try to undermine the competition in every way possible.


    Americans could have corrected the direction of their ethanol industry development a long time ago, because the American scientists have been aware and have been following all the ethanol developments in Brazil.


    But the US free market system kept the US ethanol industry going in the wrong direction. Anyway, US ethanol production is made from corn – and Americans have not seen as yet the full impact of that mistake on their food prices.


    Besides, ethanol made of sugar cane has a major advantage over ethanol made of corn.


    Why did the US make such a mistake to start with and still continues today making that mistake even bigger? Because the US government did not adjust its government subsidy programs accordingly to adjust for this new use of corn – the original US government subsidies that were on the books were geared for food production, and not for this new use of corn to produce ethanol to fuel our cars.


    It is also obvious that because the Brazilian economy is energy self-sufficient it places Brazil in a very special category of countries that are immune to a possible blockade of the Strait of Hormuz to prevent oil from being shipped from the Middle East to the rest of the world.


    Conclusion


    The readers might have one question left on their minds regarding the economic development plan that I described in this four-part series of articles. The Chinese can supply the money for all this economic development in Brazil, and the entire plan can be followed to its successful completion, and so on…


    But the Chinese would have a major question regarding how Brazil will be able to deliver year after year, on a consistent basis, and be a reliable source of food supply to China.


    Brazil would guarantee that part of the bargain through its taxation system by giving special tax incentives to farmers who sell their foodstuff to China.


    The same type of investment agreement also can be reached with the oil producing countries of the Middle East such as Saudi Arabia, Bahrain, Kuwait, United Arab Emirates, and Qatar.


    After the agreements are in place, from then on Brazil would give preference to sell its foodstuff production, first to these countries including China, and the oil producing countries of the Middle East.


    I am also mentioning the oil producing countries of the Middle East because on June 13, 2007 I spent the entire day attending a seminar in New York regarding economic development in Saudi Arabia, and I learned the following:


    The Saudis are estimating on the conservative side that oil prices will have a floor price in the coming years of around US$ 50.00 per barrel, and they expect that Saudi Arabia will have a cash flow generated by the oil revenue that will exceed US$ 13 trillion dollars for the period 2007 to 2030.


    And they are also estimating that the cash flow to be generated by the oil revenues for the combined Gulf States to exceed US$ 24 trillion dollars for the same time period. In other words, with that kind of cash flow there will be a lot of business opportunities in that area of the world year after year.


    These estimates were made when the price of oil was around US$ 65 per barrel, but on September 20, 2007 oil prices reached US$ 84 per barrel. Another important point to keep in mind is the value of the declining US dollar in world markets in response to the US government actions related to the latest financial crisis that at the same time it goes against the responsibility that the US government has in protecting the intrinsic value of the US dollar. Today the US dollar was trading around US$ 1.41 to euro 1.00 but in the near future the US dollar should continue its declining trend.


    By the way, the population of the oil producing countries of the Middle East is very small, and should not interfere with Brazil’s goal of helping to feed year after year the Chinese population under the above plan.


    There are risks for both countries when we establish such powerful long-term connections and economic ties between Brazil and China, but I am sure that the mutual benefits will outweigh, in the long run, the negatives of such a plan.


    People who will criticize the enclosed plan will say that this plan is not fair to the other countries around the world because Brazil would give preference to these countries regarding Brazil’s foodstuff supply available to the export market. I remind these critics what Charles de Gaulle once said: “Countries have no friends only interests.”


    China should go ahead and make these investments in Brazil without taking in consideration the ups and downs in global financial markets. A final reminder and something to keep in mind when evaluating the merits of this plan:


    In November 2003 an article by James Kynge published by The Financial Times “China encourages mass urban migration” said: “China is to encourage the migration of between 300 million to 500 million people from rural areas to towns and cities by 2020, a transformation that Beijing hopes will help drive growth but which will also fundamentally alter the economy and society of the world’s most populous nation.


    The biggest potential migration in human history is now part of China’s master plan. Wang Mengkui, head of the cabinet’s think-tank, told the Financial Times that the country’s urban population would rise to around 800 million by 2020, up from an official 502 million at the end of last year.


    Fast Company magazine, March 2007 issue, published an article by global trends consultant and futurist Andrew Zolli. He said in his article: “China is planning to build 20 new major cities each year for the next 14 years, and the ones it already has are growing by 13 million to 15 million people annually. Up to 300 million farmers will move from the countryside in just the next 20 years.”


    The policy-makers in China must be aware that the country’s rapid urbanization will affect its ability regarding local food production, since, when a country embarks on such a huge urban and economic development, there are also other costs when a new highway and road system, bridges, new manufacturing centers, shopping malls, condos, and so on are being built.


    Many times they are being built where before there were farms that supported the internal food production system of that country. When you replace productive lands with roads, and with all kinds of concrete structures, in the process you are also reducing even further your future food production capabilities.


    Food production is a very important issue and a matter of national security regarding the long-term survival of its people – hungry people can create chaos and even revolution – and China and the rest of the world knows what happened in China during the great famine not long ago. The impact of such a disaster would be even more devastating to China today because of the Internet and a world driven by 24/7 news coverage.


    The final conclusion is: It’s imperative that China move forward in an aggressive fashion and implement with Brazil the plan described in this four-part series of articles. And China should look at it as a matter of national security and future survival.


    For a long time I have been hearing the pundits say that an economic rising tide would lift all ships. These Chinese investments in Brazil would help lift all ships in Brazil, in turn creating further demand in Brazil for Chinese goods as well – it’s a win, win plan for Brazil and also for China.


    This article is the final piece of a four-part series.


    Ricardo C. Amaral is a writer and economist. He can be reached at brazilamaral@yahoo.com.

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