Transformation as Strategy: Brazil Vision 2050: The Road to Becoming the World’s Fifth-Largest Economy

Mackenzie Putici: Hello everyone, and welcome to Transformation of Strategy, a podcast brought to you by the experts at Roland Berger Americas, where we explore fresh perspectives and practical strategies to help business owners create a lasting competitive edge. I'm your host, Mackenzie Putici, and the topic for today's episode is Brazil's 2050 vision of becoming the world's fifth largest economy. Joining me today for our conversation is Pedro Guimaraes. He's the senior partner and managing partner at Brazil Sao Paulo office with Roland Berger Americas. Hello, Pedro. Welcome to the show.

Pedro Guimaraes: Thanks, Mackenzie. My pleasure to be here with such a qualified audience and happy to have a chat about how we see Brazil's future ahead.

Mackenzie Putici: Yeah, this is going to be really exciting. I've got a bunch of questions ready for you. But before we dive in, I do want to ask you to set the stage a bit and let us know a bit about your role on the day-to-day at Roland Berger.

Pedro Guimaraes: Sure. So, I'm a senior partner and managing partner here of our local office in Brazil. Brazil has been actually the third office opened by Mr. Roland Berger 50 years ago. So it's our 50-year anniversary in Brazil. We do have a vibrant platform here in Brazil working with clients in consumer infrastructure, financial services sectors, which are the main sectors for us, covering different range of topics from strategy to operations to transformations. And we thought that we should, after being here after five decades...give a gift to the country trying to bring a positive perspective on what would it take for Brazil to become again the fifth economy in the world, which it was in the past.

Mackenzie Putici: That's interesting, and I don't think everyone thinks of that. So we'll have to dive into how it slipped and how it could potentially come back here in these next 24-odd years. So first and foremost, our conversation's going to be exploring much of this recent report, "Brazil Vision 2050, becoming the world's fifth largest economy by 2050", which for our listeners is also available to explore in the episode show notes and go ahead and download that. Now, the report's title alone is very intriguing and you assure me it is not clickbait. There is data under this. So could you share an overview of the goals and the background of the study to set the stage here?

Pedro Guimaraes: So, the purpose of the study is to provoke global leaders and local leaders about the amazing potential that we have in this country; a country that has lived different economic cycles over the past five decades, but has a lot of comparative advantages in important sectors for the world. Therefore, we though, what would it take for Brazil to accelerate its growth trajectory from the current 0.6% growth over the last 14 years, for example, and bring it to 4% per year, which is less than what China has grown over the past couple of decades, but grow at 4% per year, that would be twice the global average and would position Brazil with its fair share in the global economy. And as a consequence, and more importantly, that would improve significantly the 250 million people who live in this part of the world.

Mackenzie Putici: You hit on something interesting there that China has grown at these levels, right? So many countries are aiming for that one and a half, 2, 3%. In this, you're suggesting 4% would get Brazil to where it needs to be by 2050, but we've seen South Korea, China hit these numbers before. So it is possible. That's exciting. And then, so I want to ask you on the flip side, what is holding Brazil back? Brazil has extraordinary natural resources, a large population, significant economic output, and yet its growth over these past several decades has slipped back, has fallen short of that potential. So what are some of the main factors that you're seeing and why it's gotten in its own way?

Pedro Guimaraes: I think first of all, Mackenzie, Brazil lacks a compelling vision and not a vision that lasts for the next election, for the next four years or even the next eight years. We need to think a bit more in the longer term and think about this country for the next two or three decades, and that's what we're proposing to do with this study. And then we're going to realize that actually what holds us back is that we have, for instance, one of the highest interest rates in the world, which makes it harder for private investments to really commit capital to this market. We also, when you think about when you want to attract capital in critical sectors in the economy, you need to have a regulation, a stable regulation for the economy, and this is an area for us to improve. Just to give you some numbers, our judiciary in Brazil costs 1.3% of our GDP, where in the European Union, this is only 0.3%.

00:05:36: And I would also claim that our judiciary is less efficient in terms of, let's say, how much time it takes to resolve the case. So, this is just one example about our lack of efficiency that prevents our ability to attract capital and capital attraction is key for us to generate jobs and to promote growth.

Mackenzie Putici: And is this judiciary structure? Or is this things like: things take a long time, bureaucracy, it's not automated, it's not done online? What exactly is that sort of inefficiency stemming from?

Pedro Guimaraes: I think we've actually advanced a lot in terms of technology. So there is actually a plot platform called gov.pr that all Brazilian citizens can assess and there's a lot of automation. And I would claim that even Brazil advanced a lot in terms of technology on that space. But still, when you think about productivity, which is let's say the ultimate KPI and you compare with private sector, there is a big lag. Another factor that impacts productivity tremendously is informality. We reduced informality to somewhere around 15% today, but 15% is much bigger than what we see in Europe, which is something around 5% of informality. So there's still a long way to go for us to improve productivity. And one of the challenges, McKenzie, that we're going to face is that differently from the past five decades where actually there was increase in the labor force, our labor force, as our population is maturing--as in many other parts of the world--our labor force is no longer going to bring the growth that we need to push GDP forward beginning, I guess, on 2034.

00:07:39: So the push or the need for us to improve productivity becomes imperative.

Mackenzie Putici: Okay. So you had mentioned attracting capital. How much of this needs to come from outside Brazil versus things inside Brazil to make this growth happen?

Pedro Guimaraes: Yeah, I think when I talk about private capital, there is of course private capital in Brazil to be deployed, but there is in a global world like ours, in order for us to bring the investment rate from 17% of GDP that we have today to 23% of GDP, you cannot rely only on local capital. We need to attract more for indirect investment. And in order for us to do that, we need to reduce interest rates. We need to have more regulatory stability. We need to have a judiciary system that brings trust to investors that want to deploy money here and understand that there is more certainty that they're going to get the returns for the risk that they are incurring on investing in emerging market. And I would say that if you compare Brazil to other emerging market opportunities, given the geopolitical tensions with China, given that Russia is out of the investment map in this world, and given that the other economies like Turkey or South Africa or even Mexico, which is close by, are much smaller than Brazil, Brazil has a great opportunity because the size of this market is bigger than the others.

00:09:21: It's a common language, it's a common political system. So it's in a way a country that brings a lot of opportunities.

Mackenzie Putici: That is exciting. And actually I went to Brazil a couple of years ago and one thing I noticed is you could pay with your phone literally everywhere. I don't think I touched cash the whole time I was in the country.

Pedro Guimaraes: Yeah. I mean, we have one of the most advanced financial systems in the world, I would say. Our banks are very productive. Itaú, our largest private bank, has always been a benchmark for retail banks on a global basis. All other retail banks go benchmark against Itaú. We have also New Bank, which is a full digital bank that started over in Brazil and expanded into Europe, expanded into North America, expanded across Latin America, and is one of the most valuable unicorns of Brazil. And as you said, with your phone, we have something called PIX that allows you to make payments instantaneously and in a very low cost. That platform together with a consumer market of 250 million inhabitants makes Brazil quite attractive for companies willing to grow here, for instance, in the consumer or retail or leisure sectors.

Mackenzie Putici: So I want to dig in a little bit more around the growth rate, that 4% that you're looking to hit, and what do you think would fundamentally need to change for Brazil to get to that and sustain that level of growth? So you've mentioned a few factors, but lay it out for me.

Pedro Guimaraes: Yeah. We articulate in the report that we first need to put the house in order. And what (does it) mean putting a house in order? We have five main pillars that we need in order to put the house in order. First of all, we have a lever, which is what we call "capital deepening". We need to increase this investment rate from 70% of GDP to 23% of GDP, and this mostly comes from private sector investors.

00:11:35: Second, we need to improve this regulatory quality and the government effectiveness. Two factors, two combined factors, because I mean the government is the one which brings credibility around this.

00:11:49: Fourth, we need to improve the labor market regulation in order to fight informality, because when you have a strong level of informality in a sector, the formal companies are worse off to invest, as simple as that. How to compete with companies that are not formal in that market when you have such a tax burden on your P&L. So this is the fourth.

00:12:21: And the fifth one, Mackenzie, that I think it's something critical and that is connected to that longer term perspective, education, because you need to have the quality of the labor, a minimal standard of quality of labor in order to increase productivity. And unfortunately, our education levels have been going down on a national basis. When you think about the public education system, we're not going to the right direction. And why (is) that? Again, because the government tends to focus only in the next four years. And when you think about education, you need to think ahead. You need to think about the next 10, 20 years. That's, for instance, what South Korea and what China did. They invested massively in education and increased those investment rates over the years in order to bring to the labor market a more qualified worker that could be more productive.

00:13:21: That's key because otherwise you're going to have an inflow of capital, but then you wouldn't have the capability to absorb and to transform that into real economic growth. And that's what we need, McKenzie, in summary. So these (are the) levers that we're calling that Brazil needs to focus on in order to put the house in order, and they're equally important. We actually modeled each and every lever, and all five levers are important to bring our GDP growth from the base case, which is something around 1% per year to the aspirational case, which is about 4% per year.

Mackenzie Putici: Okay. So you've got these five levers, you've figured out they all need to be pulled at some level at some point in time over the next couple decades. So what kind of reforms or changes need to happen to actually make these levers get pulled appropriately?

Pedro Guimaraes: The first thing, and we're going to have presidential elections this month in Brazil, this October, the first thing is to spend less. The government spends too much and we need to spend less. We need to control our fiscal deficit in order for the central bank to feel more comfortable to reduce interest rates. And when you reduce interest rates, investors are more willing to take the risk and take the money out of the liquid financial markets and bring it to the real economy. So that's what we need on a first step.

00:15:00: Once we advance on that, I think the other levers that I mentioned on the regulatory quality, the government effectiveness, the labor policies need to come together, and then the longer term vision around education.

00:15:20: And on education by instance, you have very good examples on poor states from the northeastern part of Brazil, which invested on education. And we mentioned those cases in our study like Seara or Alagos that moved, let's say, from bottom quartile to average or even above average results. Why? And what they did differently? Management. They better managed education professionally, putting targets, better compensating the professors, having the basic curriculum standardized across the system. So these might seem basic things. We know how to do it, McKenzie, but we need to be consistent and have the long-term perspective.

Mackenzie Putici: It's a challenge because like you said, it seems so simple. The tools are there. It's just how do you get it (all) to happen...get everyone marching in the same place at the same time? You've mentioned education slipping recently. Is that quality sort of based on testing or is that the percentage of people finishing their education through the public system?

Pedro Guimaraes: It's much more quality than quantity that I'm saying. Actually, if you look at the number of university students, this has grown dramatically in Brazil, but unfortunately at the expense of the quality of this education. And maybe let's take Germany as an example, for instance. Germany is a country that has a very strong industrial base that invested heavily on technical education. Why? Because they needed to prepare the workforce for the industry and it was an option rather than having lots of business administration degrees. No, they needed the workforce for the industry. Maybe Brazil needs to have that strategic plan, understand what are the sectors that Brazil has the comparative advantage and what type of labor we need, and then have this education for employment mentality and understand that sometimes just having more universities in Brazil and more jobs is not what we need. We actually might, for instance, if you want to promote the growth of the industrial sector in Brazil, we might need more technicians and not economists for the country or lawyers. So in a nutshell, I think again, we need the vision and we need the better coordination from what Brazil needs and what education can offer to this country.

Mackenzie Putici: Yeah, thanks for remarking on that, Pedro. And I grew up in Canada and there's sort of a joke that every barista has a university degree. So sometimes yes, the numbers are great, everyone's very well educated, but are they being educated in a field that then is going to give them employment? So one exciting thing that's in this report is that Brazil is uniquely positioned to benefit from several global mega trends, including rising demand for food, the transition toward renewable energy, growth in emerging markets, and increasing demand for critical minerals. So I want to ask you, Pedro, how can Brazil turn these structural advantages into engines of long-term economic growth?

Pedro Guimaraes: Yeah, these are good news for investors thinking about where to invest in Brazil. Brazil does have a clear comparative advantage vis-a-vis other countries in those sectors that you mentioned, McKenzie. So for instance, let's take the increasing demand for foods on a global basis. We do have millions of hectares of degraded pasture land that could be easily converted into a fertile soil for agriculture, which increases our production capacity. And we do believe that Brazil is going to have a disproportionate share in that growth and additional demand for foods in this sector. If you take biofuels, for instance, we're going to be able to multiply by six the current production of biofuels. And just to give an example, we're probably building the largest biofuel plant in this world, developing sustainable aviation fuels based on Macauba, a local palm oil, that is going to be planted close to Salvador, Bahia in the northeastern part of Brazil, and hopefully is going to fuel thousands of airplanes in this world and this is a project to go live in the next five years.

00:19:58: If you take other sectors in infrastructure, for instance, if you take water and sewage, we see that the private investment has increased from half a billion dollars to $5 billion, and this could grow even up to $6 billion a year up to 2032, given the current regulatory incentives that we have for private companies to invest and gain concessions on that sector.

00:20:28: If you think about the huge consumer market, local consumer market and the emerging middle class and people migrating the Maslow pyramid from the basic needs to more sophisticated demands for leisure, for out-of-home consumption and so on, this is going to generate opportunities for companies willing to benefit and invest in those millions of emerging middle-class consumers that are going to grow in this country. So I'm optimistic about Brazil's future because we believe that we know what we need to do in order to put the house in order first, and then we have comparative advantage to serve and benefit from global mega trends that were portrayed in Roland Berger Institute's report a few years ago.

Mackenzie Putici: That's an interesting point because there is still quite a bit of disparity between the rich, the poor, there's a middle class and it is growing. So I'd be curious to know where you see that shifting in terms of this vision for Brazil, but what does that really mean in terms of the growth trajectory for Brazilian businesses, workers, communities, and do you see this compounding? Obviously 4% next year and the year after and the year after ultimately becomes over a hundred percent growth in 20 years versus the 1% only adding up to a little bit. So yeah, paint the picture for us, Pedro.

Pedro Guimaraes: Yeah, I mean it's not going to be a linear trend for sure. I'm positive we're going to leave different cycles. It's not going to be that we're going to hit 4% per year, but we need to create a central vision on what should be the role of our strategic sectors in order for us to get there, what should be the GDP contribution of the different parts and regions of Brazil in order for us to get there. Countries like China, for instance, they operate like this since they have a central government that dictates the things in that country, and I'm not arguing that we should go that direction, don't get me wrong please, but what they do professionally is that they have very clear targets for the different sectors and they have very clear targets for the governor of states on what they need to do in order to contribute to get there.

00:23:09: So what I say is that we don't need to be a dictatorship, we could be a democracy, but have that vision and have the public sector playing more of a facilitator, an orchestrator role, a regulator role to private sector leaders that are going to invest and create the employment and the trajectories of the different companies in order for us to get to that place. Today, our current GDP is $2.3 trillion, so it's roughly like 10% of the US largest economy, and we need to grow to $6 trillion by 2050. And we believe that if this doesn't happen, we would still be probably at $3 trillion, $3.3 trillion country and the 11th economy in the world, which is not what the Brazilian citizens need in order to flourish in society.

Mackenzie Putici: Well, just to back you up, I know you've made the comparison to China, but in Canada we actually do this as well. They classify have not and have provinces and money does get redistributed depending on development goals by the central government. So there is debate around this always. Some people like it more than others, but like you said, if a country needs to work together, advance together, there are definitely interesting ways to do this that benefit everybody. So we've covered a lot of information here, which is great. This has been a great conversation so far, but I want to ask you a little bit more about what we could keep our eyes on. So as the next five, 10, 15, 20 years pass, what kind of markers are you looking for to show that Brazil is on the right trajectory?

Pedro Guimaraes: So, if you look over the past 14 years, Brazil has grown only at 0.6% compound per year. So this is more than a decade growing below 1%. For a developing economy, that's really poor. And (it's) exactly because of that, that I believe that we are probably in the end of a downturn. Nobody can say whether this is really the end of the downturn or whether it's going to take another couple of years, three, four years maybe. But I would argue that it's exactly the best moment to invest in Brazil. Why? Because assets are undervalued because of everything that I mentioned. And if you do believe that Brazil is large enough to (not) go wrong, too big to fail, as you used to say, maybe it's the right moment. Even if we have another couple of years that are of low growth, maybe it's a moment for you to better understand the market, to test a few things.

00:26:27: But if you invest for the longer run, if you commit to this country for the next two decades at least, as I mentioned, and you bet on the right sectors, and I mentioned a few, maybe another sector that I didn't mention is critical minerals. If you think about electrification, for instance, and everything that has been happening around the electrification chains for batteries, for instance, we do have very large leaching reserves. We do have neobium, which is another important critical minerar. We are the largest producer of neobium is Brazil. And this mega trend is going to create very interesting investment opportunities. I have no doubt.

Mackenzie Putici: So for anyone out there in the audience who's interested now in maybe investing in Brazil, buying low, selling high over this next journey, where would you suggest they look or what opportunities are that they can take advantage of?

Pedro Guimaraes: Agrisector would be strong on my list given our comparative advantage in multiple commodity sectors. So definitely also looking into infrastructure for the agrisector as an important thing. Second, as I mentioned, water and sewage. I think we now have the regulatory stability that we need in order to attract more capital at scale. I would look into biofuels. I think we do have the opportunity to be the largest producer and exporter of biofuels in this world. Critical minerals, as I mentioned, because of electrification and other trends. And last but not least, internal consumption, because given the size of the market and given the growing and emerging middle class, that's going to open up a lot of opportunities for consumer companies willing to find double digit growth opportunities in different parts of the world.

Mackenzie Putici: And would you say that's quite unique to Brazil in the sense that maybe there's other countries that have a lot that can export natural resources, but you're also able to grow your personal consumption of those same goods. It's not solely an export game for Brazil.

Pedro Guimaraes: Yeah, that's the benefit of having 250 million people in your country of having already a 2.3 trillion economy going on. That's also the fact that we do have a political system that we always say that do not allow us to be like Switzerland, but never to be like Argentina or Venezuela in the other extreme. So it's a bit more stable in that sense. So this gives me the idea that Brazil for the longer term with a little bit more consistence, aspiring leadership and vision, we can create the steps to get there. It's not going to be linear. We're going to leave some cycles, but we're going to get there.

Mackenzie Putici: All right. Well, exciting. Pedro, this has been fantastic. I've got a lot of valuable insights from you today, and of course I appreciate your time and discussing Brazil's potential for transformation looking ahead for 2050 has been a pleasure. Thank you so much.

Pedro Guimaraes: Thanks, Mackenzie. It was a pleasure to be part of this podcast. I'm a big fan of Brazil, as you could see, passionate about economic development. So for the audience willing to know more about Brazil, please download our study in Roland Berger's website. Please feel free to reach out to me and send messages on LinkedIn, and I'll be happy to follow through.

Mackenzie Putici: And as Pedro mentions, everyone, do grab that report. It is in the show notes for this podcast episode, so definitely grab that. And for more information about what the team at Roland Berger Americas is working on, you can visit www.rolandberger.com. And if you're a fan of this show, please share it with your colleagues and be sure to follow us on Apple, Spotify, or Podagee.