Month: January 2011

Mudslides in Brazil have killed around 900 people in the last few months. These are not natural disasters. Although the proximate cause is heavy rain, it is the deforestation and the uncontrolled building on steep hillsides that turned weather events into deadly disasters.  Brazilians understand this and have been looking around to other countries that have done better.  The most current example is Australia, which suffered the worst floods in decades with significantly less loss of life.  But Brazilian TV has also gone to New Orleans to assess the successful American response to Hurricane Katrina.

One of the hopeful aspects of the recent Brazilian disasters was the response of Brazilian society.  There were more volunteers to NGOs than could be used and people were lined up to donate blood for the victims. This may seem unremarkable from the American point of view, but this is an evolution in Brazil.
Until recently, Brazilian civil society was relatively weak with a centralizing government taking the predominant lead in most situations. The fact that the government by itself was often not up to the job did not discourage the belief that it should do it all. Like most developing countries, Brazil was thick with laws and rules, but there was often little enthusiasm for following or enforcing many of them.  There was the tacit agreement that the network of rules could not work and finding a way around them (Jeitinho Brasileiro) became a fine art. This had the beneficial effect of keeping things working, but also contributed to lots of trouble.  The uncontrolled building and deforestation that caused the recent disasters, for example, was almost all illegal, but laws could not be enforced.  In some ways, the laws were “too good.”  Their provisions were not executable by actual people in real situations.

What impressed the Brazilian television reporters about New Orleans was not the government’s response, which remains inadequate in many ways. The success in New Orleans is Make it Right, a non-governmental organization spearheaded by actor Brad Pitt.  Make it Right is doing innovative things quicker than any government bureaucracy could manage. Rather than building cookie cutter projects or maybe not really building much of anything at all, as is often the government response, Make it Right is constructing homes that different and unique. They are adapted to the environment, so that when the next flood comes, these homes will survive.   

The lower 9^th Ward of New Orleans is becoming a place where homeowners can experiment in new ways of building environmentally sustainable communities, not just individual homes, but whole communities with local vegetable production, rain gardens and open space. The unique thing about all this is that it is not top-down, nor really bottom up. Rather it is a partnership with ideas moving both ways. This is a development to watch.It might seem that I am critical of government because government has “failed” to do what Make it Right is doing. On the contrary, the beauty of the system is a government that allows, enhances and encourages  the efforts of private individuals and groups. The government cannot do these sorts of things and a wise government recognizes that it does not have to. The total society response is what counts; government is only one part of total, sometimes the most important part, often not.

Government contributes in a particularly American way based the choices of the people and on our tax code. For example, I decided to contribute money to Make it Right, and because of the nature of our tax system – i.e. the tax exempt status – government essentially matched part of my contribution. After granting tax-exempt status, no bureaucrat needs decide which charity is worthy. The individual Americans decide with their preference, knowledge and with their own money. This distributed decision-making is a total society response with a role for business, government and individual Americans. Balance is important.

Government doesn’t have to and should not try to do it all. We fallible human beings don’t know what a perfect society would look like, so we can’t empower government to create one. We can create a government that contributes to conditions that help citizens prosper. A good society doesn’t solve all problems; it enables citizens to do the right things & make their own choices. 

I remember going up to the Vale dos Sinos with George Lannon, the Consul in Porto Alegre.  Our mission was to talk to Brazilian shoe makers there.  There was a trade dispute back then. Brazilian shoe makers, many located in the Vale dos Sinos near Porto Alegre in Rio Grande do Sul, were producing inexpensive, good quality shoes that were beating the domestic producers in the American market. This was more than twenty-five years ago.
I recall hearing the competition talking about the various “unfair” advantages the Brazilian shoemakers enjoyed.  They were close to inexpensive sources of quality leather, because of all the cattle raised in the region; they had the advantages of cheap labor and a low exchange rate; some people complained that labor conditions were oppressive.  (At the factories, BTW, we found working conditions were good.  It reminded me of Germany in many ways, since many of the people there were of German descent and they seem to run their businesses on that model.)  On top of all that, they made good shoes  because the firms were well managed and the workers skilled.  They studied and brought back skills from the premier leather processors in northern Italy.  I really had to respect their initiative and follow through.

Times change. I understand that. Nevertheless, I was surprised to learn that many of those thriving factories were closed or suffering mightily, not only Rio Grande do Sul, but all over the Brazilian leather industry. They could not compete with the cheap imports from China.  Brazil tried to protect its leather industry, but the Chinese figured out ways around the barriers and their price advantage was just too overwhelming.  Nobody has a permanent advantage and the apparently monumental Brazilian advantages evaporated in the last quarter century.  The Brazilian shoe makers complain that the Chinese have unfair advantages. They have access to cheap leather, a low exchange rate and labor that works under oppressive conditions. They might be right about some of these things, especially about the exchange rate, which the Chinese keep artificially low, but it doesn’t change the outcomes.

When American firms were faced with competition from cheaper products, one of the responses was to move to higher value added products.  Some of the Brazilian firms are doing that too. A report on Brazilian TV explains how Brazilian firms are making very high quality, customized products.  

Ironically, many of their most expensive shoes are aimed at the Chinese market. They evidently found a niche there among rich Chinese, who are willing to pay high prices and are impressed by the outward signs of quality as well as the snob appeal of having something expensive and custom made. 

People who study these things call them “positional goods” and refer to things that are valued less for their qualities than for their exclusivity. A rich person can only eat so much, drink so much or wear so many sets of clothes. In our modern world, even relatively poor people can partake in the luxuries once the exclusive domain of the rich. It makes it harder for the rich to express their status. The availability of tangible goods can expand. Everybody, or almost everybody, can have a refrigerator, good shoes or clothes of decent quality, but relative status is limited.  Status seeking rich guys look for things that are limited.   Returning to the example above, everybody can have good shoes these days, but the exclusive, handmade shoes are rare and so status enhancing for those who care about those things.   Thorstein Veblen wrote about this a century ago when he coined the term conspicuous consumption in his “Theory of the Leisure Class.”

For the time being, this redounds to the benefit of the Brazilian shoe makers.  The Chinese keep their currency artificially low against the Brazilian Real (against the dollar too, but that is another story), which makes Brazilian goods more expensive in China than they would otherwise be. But in the case of conspicuous consumption goods, price doesn’t matter.  In fact, the higher price, which keeps poorer people from owning the goods of desire, may actually heighten their attractiveness.  So the shoemakers get benefits from the high price they can charge enhanced by their overvalued currency, when they collect even more money from the Chinese fat-cats. 

Nevertheless, they should not rely on this situation lasting forever.

I have been following business stories for more than twenty-five years. I read about the decline and fall, and sometimes about the rebound and success.  Today’s hero may turn into tomorrow’s dog, as good times are followed by bad ones. But wait, you might make a comeback. Continued success depends on continuous adaption. The game is never over; there is no finish line. This is bad news when you are on top, but encouraging if you are not.  Veblen has an insight about this too. He talked about the advantage of borrowing and the penalty of taking the lead.  When you develop something that works, others can copy what works, leave behind the mistakes & then innovate some more. The Brazilian leather workers did this a quarter of a century ago, when they learned the best techniques from places like Italy & the U.S.  The Chinese did it after that. Everybody can do it, but we need to pay attention and be open to change.

Brazil is changing rapidly, as old habits and institution disappear or are altered beyond recognition.  One of the mainstays of Brazilian “middle class” life has been cheap domestic help. It was not only the very rich who had maids, gardeners and other sorts of helpers around the house.  People with incomes similar to those of an American family of around or just a little above our median income could afford household help.  The reason for this was abundant cheap labor resulting from a fairly deep chasm between what we would recognize as middle class and what we would see as real poverty.

Most Brazilians have become better off in the last twenty years.  Although the income distribution per se has not changed much (the rich got richer too and Brazil is still an unequal place), the general increase in wealth has disproportionately helped the poorer Brazilians.  Relative wealth matters, but absolute wealth matters more when you are trying to climb out of poverty.   A rich person whose income doubles might be able to buy a nicer car of a bigger refrigerator, but he already owns those things and the additional utility he gets from a better model may be small or even trivial.   The poor person, however, who for the first time gets into the income bracket that he can afford his first car or his first refrigerator feels a quantum leap in his lifestyle.  In the last couple decades, perhaps 50 million Brazilians have climbed past the threshold where they can afford the basic comfort level.

There are also generally better opportunities and people are better able to take advantage of them, as well as few people to do the work.  These three factors interplay.  A big source of domestic help and unskilled labor in general had been the rural areas, especially in the chronically poor regions of the Northeast. Nordestinos , often living on marginally productive small farms, took buses to the cities in the richer South or Southeast whenever life became unbearable or a drought hit the region. Both these things happened with monotonous regularity, but the high birthrates seems to ensure an unbroken supply of very poor people seeking a better return on their hard work. 

People used to talk about the two Brazils. One scholar characterized the country as “Belindia”, i.e. part was rich as Belgium and the other as poor as India, but there was no border between them and the richer cities of other parts of the country. It would be as if the poorer parts of Mexico or India were part of the United States. This was not strictly a geographic phenomenon. The rich and the poor in Brazil often live very close together, but there was a definite geographical aspect too. 

The Northeast is still poor, parts are developing rapidly, actually drawing in labor from other places .  If you bought a Ford Fiesta last year, it was probably made near Salvador, Bahia, part of what used to be an abysmally poor region.   There are lots of people ready, willing and able to work if there is a chance to do it. At the same time, population growth is slowing even among the poorest Brazilians.  Demographic inertia will carry the population higher, but the drivers have stopped.  Among those smaller numbers, illiteracy has dropped, meaning that people can take advantages of more of the available opportunities.   Domestic help doesn’t really need to read.  Most other jobs do. Illiterate or semi-literate people are stuck in the jobs that are going nowhere but the kitchen or the garden.  

It is a healthy sign that it is getting harder to get good domestic help.  Live-in maids are not very productive for the society as a whole.  But their sudden disappearance has created some problems.   A world with full-time maids does not invest much in labor saving devices.  Most American homes, even those of the “poor” have appliances such as dishwashers, microwave ovens and efficient washing machines and driers.  Americans with lawns own power lawnmowers.  People have power tools  and most Americans are accustomed to using them.  There is also something we often overlook.  

Things in the U.S. are simple to use and keep in good repair.   Our shirts don’t require ironing.  Our floors are naturally shinny and don’t need to be waxed much or at all.  Frozen food sections are full of fairly good tasting products that can be zapped in the microwave and ready in minutes. In short, an average American home comes equipped with machines and features that take the place of full-time household help.   Brazilian houses are not like this.  My house in Brasília, which is obviously built for a person richer than I am, did not come equipped with a dishwasher.  I don’t think you can even find a newer house at or above the median price that doesn’t have a dishwasher.

There is a sudden boom in household appliances.  Dishwashers, driers, microwaves etc are selling very well.  I have not actually studied this, but I bet there is also a trend toward simpler construction, more prefab and easier to maintain features.

A recent article re this subject (in Portuguese) is here.

I also noticed more ads about cleaning services.  It looks like the future here will be more like the present in the U.S., with most of the maid’s work done by labor saving devices and people who can afford it hiring cleaning services once a week or for special occasions.   

A related phenomenon is illegal immigration.  As Brazil’s economy grows and Brazilians no longer want to do the dirty jobs, others are being drawn in to take them.  It is funny to see Brazilian attitudes toward illegal immigrants coming to resemble ours in the U.S.  The news has recently featured stories about Haitians.  They come on a roundabout route  through Peru.