Posted on behalf of Seth Whetzel
One thing that I’ve been reflecting upon since my return from the Mason Global Residency in Brazil is my newfound appreciation for the term “confidence”. This word is oft-used in just about any good MBA program, or at least in any good finance MBA program. Consumer confidence, investor confidence, confidence in the markets; the list of expressions with the term “confidence” goes on and on. As an undergraduate economics major, it always struck me how important such a fickle, intangible concept was to our overall economic growth. Yet the immense power that confidence wields on economic growth was never so apparent to me than in Brazil. It is just in the past decade or so that Brazil has emerged as a true world economic power, and it is no surprise that this emergence coincides with the first time in Brazil’s long history where its citizens actually have reason to be confident, even optimistic, about their future. After a century of political upheaval and instability, rampant inflation, sky-high interest rates, and rollercoaster exchanges rates, we learned two very interesting facts about Brazil. The first is that the rich generally keep about half their wealth outside of Brazil to protect themselves from what used to be the common occurrence of the value of their money vanishing overnight due to one of the aforementioned causes. The second is that those who are not wealthy (the majority of Brazilians) do a great job of avoiding paying any taxes by doing the majority of their business under the table. Both of these phenomenons are directly related to a lack of confidence in the political and legal institutions in Brazil and both have had a huge drag on the economy over the years. Imagine if Brazil’s wealthy kept 100% of their wealth in-country and suddenly doubled their domestic investment. Imagine if most Brazilians started paying taxes and the Brazilian government suddenly doubled their tax revenues. Imagine the combined impact on internal infrastructure and education – two of the domestic obstacles that have prevented Brazil from growing even faster and might represent a ceiling for Brazil’s economic climb.
For the longest time, Brazilians had no reason to be confident. Political stability was only a fantasy. But in the 21st century things appear to be different, and the dramatic lack of confidence that Brazilians have had in their own country is now starting to change. While remaining cautious, Brazilians have reason to believe, especially after surviving the recent global financial collapse relatively unscathed, that they have turned the page. There have witnessed their government manage successive democratic presidential elections while keeping inflation and interest rates in check for over a decade. And with that newfound confidence, we see huge growth and huge potential for the first time in modern Brazil’s history. Compare that to the situations in the U.S., where political gridlock has shaken Americans’ confidence in their politicians’ ability to do what is right for the country; and in Europe, where the common currency is on the brink of collapse and there is a very real possibility of the United Kingdom leaving the European Union. In these classic Western economic powerhouses, economic growth is stagnant and even declining. A little bit of confidence goes a long way, and for once, Brazil is winning the confidence battle.