On top of the world: Why Brazil is booming

It is a 100th birthday party in a well-to-do postcode of Sao Paulo, where the house of our journalist host – he and another writer pal are actually each turning 50 – slips graciously down a slope to a terrace and the chatter is nearly all politics. Then the DJ cuts the music in the middle of a samba everyone knows. They reflexively fill in: "Ò coisinha tão bonitinha do papai" – "Oh daddy's beautiful little thing".

Not everything in Brazil is beautiful. Not the slums, or favelas, which ring cities like this one or Rio de Janeiro, or last Saturday's national glee when Argentina – neighbour and perennial rival – crashed out of the World Cup one day after the Brazilian squad's humiliating Dutch demise. ("Que desgraca!" squealed an old man when the stricken face of Diego Maradona filled the TVs in a bar on Sao Paulo's Teodoro Street.)

Yet you cannot spend a day in Brazil without sensing the economic miracles happening here – first quarter growth touched 9 per cent and the helicopter pads atop the skyscrapers of Sao Paulo are buzzing with air traffic again – or hearing of the achievements of its President, Luiz Inácio Lula da Silva, recently named the world's most influential leader by Time Magazine, in raising the country's profile on the world stage and lifting much of the population out of poverty. The somewhat lefty party-goers were not actually thinking of Lula and Brazil as they sang about daddy and his baby, but they could have been.

The legacy of President Lula, a former lathe operator, is a conversation point if only because the race to succeed him kicks off this week. The constitution bars him running for a third term. While his hand-picked successor in the ruling Workers' Party, Dilma Rousseff, is an electoral virgin (she was his chief-of-staff), polls suggest she will prevail on election day in early October, thwarting the hopes of conservative opposition leader José Serra, a respected former governor of Sao Paulo state.

Ms Rousseff will inherit a country bursting with fruit. As if it wasn't enough that Brazil was already to host the next soccer World Cup, Rio de Janeiro last year barged aside Chicago to win selection as host city to the 2016 Summer Olympics. This as Brazil rushes to exploit vast reserves of oil off its shoreline close to Rio. Rather than giving them pause, the crisis afflicting the deep-sea drilling industry in the Gulf of Mexico is if anything spurring Brazil to move more quickly to increase production. Oil revenues now stand at 12 per cent of the national GDP and may rise to as much as 20 per cent.

It is a country that has moved far beyond the clichés of its international brand – the contours of its tanned beach-goers and catwalk models. Brasilia is agonising about keeping control of its economic boom while the rest of us are squabbling about the respective benefits of deficit-slashing austerity versus stimulus spending. (President Lula apparently thought that debate sufficiently boring that he did not show up to the recent G20 summit in Canada citing flooding in north-eastern Brazil.) The chatter, at this party and elsewhere, risks running away with itself. "They get a little bit carried away," a correspondent for a foreign news agency whispers, citing Brazilian diplomats telling him that China is investing in Brazil so feverishly because it sees it overtaking the United States soon as its most important export market. Come now.

Look hard enough and you will find sensible people in Brazil willing to identify those things that are not going so well, like the failure to invest in infrastructure (Sao Paulo's international airport is grittier than a Greyhound bus stop), Brazil's inability to upgrade school-age education and the still utterly byzantine ways of its bureaucracy and taxation system. Steve Jobs recently rejected a plea from the city government in Rio de Janeiro to open an Apple shop there. He shot back that the "super-crazy" tax system in Brazil "makes it very unattractive to invest in the country" and that "many high-tech companies feel that way". In all the pro-Brazil hoopla, this rude rebuff by Jobs registered with no one except a few attentive bloggers.

That Brazil is on the move, threatening to leave its similarly aspiring neighbours like Argentina and Mexico in the dust, is no longer in dispute, however. China has been in the know for years, but that is because it long ago turned to Brazil for so many of its desperately needed raw materials – everything from soy to iron ore to lumber. Now others are starting to pay attention. If Brazil, the B in the so-called BRIC group of fast-emerging nations (the others are Russia, India and China), is indeed on a path towards eventually joining the ranks of the developed nations, no one wants to be caught by surprise.

Thus the awful international airport in Sao Paulo is fit to burst only in part because Brazilians are discovering that having a relentless rising currency – the real – is a marvellous thing when travelling abroad. Adding to the traffic are the foreign businessmen and investors galloping into town, cheque books at the ready, to find out what is going on and how they can share in the suddenly exploding pie.

"I never imagined Brazil really becoming such a strong country, especially how it has in the last 10 years," muses Carlos Jereissati, chief executive at Iguatemi, Brazil's largest chain of shopping centres. "Everyone is looking at us and saying: 'Wow, these people are really growing – they have the economy, they have the oil, they have the Olympics and the World Cup, we need to pay attention!'"

No one knows this better than Mr Jereissati who travels to London, New York, Paris and Milan to lure new luxury brands to his malls. Diane von Furstenberg, the fashion designer, recently opened her first Brazil outlet in Iguatemi's flagship mall in Sao Paulo. She says it has been the best opening in her company's history, selling "over a million dollars in its first six weeks of business". The boom means Mr Jereissati is ready to expand and quickly. "While it took us 20 years to do eight malls, we are probably going to do twice that in the next five years – we have a lot of money to do things." That is thanks largely to the expansion of the middle classes and their growing spending power.

And the ball just keeps rolling. The day we meet, Mr Jereissati, whose uncle is a senator in the party of José Serra and whose brother runs Oi, Brazil's biggest landline telephone company, is getting ready to entertain the bosses from the leather goods purveyor, Goyard, from Paris. And this Monday he was to play host to François-Henri Pinault, whose group includes Gucci, Christie's and Yves Saint Laurent (and whose wife is Salma Hayek). "In the past, maybe the second or third level of the company would come to see what opportunities are here. Now it's the main man who comes," Mr Jereissati notes.

Telling also are the beginnings of a reverse of the trend where young, privileged Brazilians assumed they would go abroad for university and quite likely their careers. It's the route that Julio Vasconcellos, now 29, followed. But having been in the US for 10 years, most recently in Silicon Valley in California, he talked to a friend over the New Year about a possible internet start-up in Brazil. They dreamed up peixeurbano.com – urban fish – where consumers learn about retail bargains. On a Wednesday in March, he tells me, he arrived in Rio de Janeiro – more specifically in the hip Botafogo district – and by the Thursday the site was up. He employs 40 people and is interviewing for 30 more positions.

"I just felt it was the right time to come back," he said. "You are starting to see people who are more open-minded and with a more international focus looking at Brazil as an opportunity and making bets on it in the same way people in the 1990s made bets on China." The horizon in internet development may be particularly wide and rich. "Every day I have a meeting with a different partner and five different ideas come to my head that would be huge business in Brazil that nobody is doing anything about. You can't do that in Silicon Valley."

While Brazil remains, according to the World Bank, one the worst countries for the gap between the rich and poor, the income divide has begun to close in the nearly eight years of President Lula. True the favelas, running with sewage, guns and drugs, remain a feature of the urban landscape, especially in Rio de Janeiro where more than just cosmetic surgery will be required before the 2016 Games. But the number living in poverty has fallen during his two terms from about 50 million to 30 million. Studies meanwhile point to slightly more than half of all Brazilians now belonging to a socio-economic group broadly described as lower middle class. They will not visit Gucci in Mr Jereissati's malls, but they will go to the less flashy retailers like C&A or Topshop when it makes its debut in Brazil next year.

Brazil has been lucky, both finding its reserves of oil and in its partnership with China, which has helped considerably to drag it into greater prosperity. (Were China to trip, Brazil may fall hard.) President Lula also inherited an economy that, after the catastrophe of hyper-inflation in the early 1990s, had already been transformed by the policies of his predecessor, Fernando Henrique Cardoso. But, even his detractors agree that despite his past as a leftist union organiser, he has shown an unexpectedly steady hand guiding the economy and that his welfare policies have been crucial in ensuring that Brazil's rising tide has lifted most, if not all, boats.

That is not to say Brazil is set for good. Some economists worry of bubble conditions forming and warn especially about gushing capital flows into the country and the ceaseless upward movement of the currency. It's not just that dinners in Sao Paulo now cost as much or more than in Manhattan. The supercharging of the real also threatens to stunt any move in Brazil away from a commodities economy to a manufacturing one because as an exporter it is becoming ever less competitive.

Gustavo Ioschpe, an economist and columnist for the weekly magazine Veja, scoffs at the notion that Brazil is within years of entering the club of truly developed countries. President Lula, he says, has done nothing to tackle political corruption or the country's woeful infrastructural problems. Only 10 per cent of its roads are paved and at harvest time, lorries can be seen lining the roads to the over-stretched ports, their cargos of soy rotting in the sun. To the mortification of its nearly 20 million residents, Sao Paulo has been told by FIFA that plans to upgrade its only significant football stadium are so inadequate that no matches will take place in the city during the next World Cup.

But the biggest worry for Mr Ioschpe, formerly of Goldman Sachs, has been the refusal of the "anti-intellectual" President Lula to do anything serious about education. That all children now have the right to attend schools, to be taken to them on buses and fed lunch, is not good enough if they don't learn to read and write, he says. "This is our biggest challenge and most likely the one that will take the longest to be fixed and the one that will have the greatest negative impact. Building roads is one thing, but how is it that Brazil still does not know how to do the most simple of all things which is to make 7- and 8-year-old kids literate? It's incredible. That has been mastered by the developed world for last 200 years and even by our neighbours like Argentina and Chile for the last 100 years."

Nor is it clear that the other plank of President Lula's legacy, his South-South foreign policy which has seen Brazil aggressively strengthen diplomatic and trade ties with Third World governments for example in Africa where he is today, will turn out to be all good for his country. What the Wall Street Journal has called "his dance with the despots" has seen President Lula chumming with the likes of Hugo Chávez, Raúl Castro and Mahmoud Ahmadinejad who lead countries that are several prison camps the wrong side of being democracies. Some diplomats in New York believe that President Lula's recent visit to Tehran – where with Turkish help, he negotiated a faux-solution to its nuclear stand-off with the West – so irritated Washington and other capitals that Brazil's campaign for a permanent seat on the UN Security Council has been set back years.

Now on a tour of African states, President Lula was asked whether he was campaigning to be the next Secretary General of the United Nations. It was just his style to reply that he had no interest because the job is for a "bureaucrat" and he, essentially, is above it. Both Brazil and President Lula are occasionally accused of hubris and it is easy to see why. Perhaps it is for the best then that when he attends the closing ceremonies of the World Cup in South Africa on Sunday, it won't be Brazil that goes home with the trophy. That would surely have made both daddy and child beyond smug, even insufferable.

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