Learning from Brazil’s mistakes – how can SA release the handbrake?

South Africa has just witnessed the appointment of a new Cabinet of Ministers at the behest of Jacob Zuma's second term as the President of the country. The state of the nation is currently fraught with concern from all sides of the South African and International community, how can we best address our problems? Where lies the solution to the poverty, the inequality, the corruption, the labour unrest and the crime? As a BRICS nation we share many similarities as an emerging market player, struggling to break loose of the hindrances, to soar into the economic glory that is theoretically attainable. We have the tools to fly, but the machinery desperately needs to be assembled and commandeered by sound leadership and policy. Geoff Blount, CEO of Cannon Asset Management has a unique view on the parallels between South Africa and Brazil and what we can learn from one another in the pursuit of economic powerhouse status. The only problem is that in a big way, we are our own 'handbrake' – LF 

ALEC HOGG: Each BRICS country is unique. However, South Africa and Brazil do share some similarities. Joining us in the studio to find out what this country can learn from Brazil and vice versa, is Geoff Blount, the Chief Executive of Cannon Asset Management. He is married to a Brazilian. He visits there often.

GEOFF BLOUNT: Yes, on business and pleasure.

ALEC HOGG: You married into her family and I guess, that sometimes gives you a far better insight when you're talking. I often talk to asset managers who say they go to countries and listen to the cab drivers. I don't know how good an insight that gives them, but when you marry into a family, you would be getting an opportunity to perhaps see it as the local people do.

GEOFF BLOUNT: Especially with a big family.

ALEC HOGG: How big?

GEOFF BLOUNT: Lots and lots of cousins. It's interesting, because if you go there on business you gain one perspective, and then you go there on holiday – but not a tourist holiday – you go there to spend time, and I think you get a lot of insight into a culture, a country, and a feel for what it's doing or rather, what it doesn't do.

ALEC HOGG: People talk honestly, when they're family, don't they?

GEOFF BLOUNT: Yes, you get a kind of a feel then, so I'm always amused. I don't have any special insight and I'm not an economist. I'm not trained on Brazil, but I'm always interested. There are many parallels with South Africa and therefore, people assume that the solutions Brazil created – and problems, by the way because in having created solutions, they've created other problems as well – can be replicated in South Africa. For example, why don't we just copy the Brazil model, which is a very interventionist economy model? I think that's a warning sign for us. We must learn what we can from them, but just be careful that the Brazil miracle is probably not the miracle people think it is. I think it's more cyclical than structural, so we have to be careful.

ALEC HOGG: You speak about that interventionist model and we've put your piece up on BizNews, so anyone can go and read it. Where I was confused, was in Davos this year. I spent a bit of time around Dilma Rousseff, the Brazilian President, and she was talking a very different story. She was talking about privatising ports, privatising the highways, and bringing in toll roads etcetera. Is that just for the Davos audience?

GEOFF BLOUNT: It's partly for the Davos audience, but I think they've now hit the bottom of the barrel. What happened was, Cardoso came in many years ago, introduced many market-friendly and quite a conservative economic policy, and that got the steam train going. He then exits in the face of Lula and Lula starts intervening, but Lula gets lots of praise because of his successes mainly from a social perspective, which worked, but they start intervening then, the economy starts slowing down, and the State starts getting involved in seizing everything to the extent… Rousseff gets in, goes ballistic, and she really pushes the envelope on intervention. The Brazilians…the tax stake in Brazil is more than 40 percent of GDP. We're at 30. That gives you the level of interventionism, now its ground to a halt, and now they have somehow unwind some of this and realise 'hang on. While you can have great social intervention', which I think is fantastic, 'perhaps you need to have a slightly more liberal framework in managing the economy. I must say that's one of the things that always makes me sad about South Africa: we think that you can't have a liberal management of the economy…that means you have to be nasty to your citizens and you can't give them a social network. You can give them a social network, but in a very pro-market economy. I think maybe Brazil has now gone to the brink, realising they're not creating any more jobs, the middle class is very unhappy, they had all these mass protests last year (we call them service delivery there) – it's the middle class that went out onto the streets, and I think they got a very big fright. Dilma doesn't go to the soccer games because she gets booed.

ALEC HOGG: Like someone else, we know.

GEOFF BLOUNT: It's interesting, so I think we need to pick the gems there, which is what they got right from the social side, which is education and raising the poor up rather than taking away from the rich, because the gap between the rich and the poor is not dissimilar to South Africa so they're getting that right. I think they went down this long interventionist route and now they're stepping back from that. Hopefully, we learn those lessons. It doesn't look like the current Cabinet is going to take any heed of that, so pick what you want from Brazil, and then learn.

GUGULETHU MFUPHI:  What's also interesting is the commentary you have here, which is that you don't believe that S.A. or Brazil could become a powerhouse economy such as China or India.

GEOFF BLOUNT: Those are the issues that you need to fix here and there. We're not addressing them in either countries – here, it's probably even worse – and this is the supply side of stuff. You have to get your infrastructure working and efficient. You have to get electricity and you have to get your bandwidth in, so you need to get connectivity and you need to get education right so that people are well educated and marketable in that you want to hire staff. You need to get your Labour Act right. These are all supply side stuff, and until we and Brazil get it right, we are going to have a handbrake. We'll never be a six percent economy and that's what we need to get right. This is the dilemma that politicians face.

ALEC HOGG: An interesting point you made before – and it's something that in South Africa, when there was Arab Spring, there was concern – but the social delivery protests in South Africa have been rather fairly muted. In Brazil, it was anything but muted, and Brazil was further along that interventionist path, which we now seem to be quite keen to follow.

GEOFF BLOUNT: Yes, it was very widespread. I'll tell you what happened in Brazil. It was actually the middle class that went out onto the streets. It wasn't the poor and disenfranchised. It wasn't the people in the favelas, which would be our townships – very poor informal settlements – that were out protesting. This was the middle class, so these are people in a mass rally. Imagine if the Johannesburg middle class took a three-hundred-thousand people march through the city: that's what happened and that's what topples governments, so Dilma's had to pull back. One thing that Brazil has – South Africa's great scar is Apartheid – Brazil's great scar is hyperinflation. Any government there that actually even talks enough populism that might stoke inflation will lose the election. They are petrified of inflation, even though it's relatively high in the global context. Even there, there's that natural handbrake and if that hadn't been there, I think they would have gone even further down a social experiment. Brazil is a different country as well. I always use the analogy that South Africans, if they run, they do the Comrades. In Brazil, if they run, they go jogging down the beach. It's a very chilled, laid-back kind of country. We're far more hyperactive.

ALEC HOGG: Engaged.

GEOFF BLOUNT: Engaged, and far more intense in our emotions than… With respect to our country: the way its run – our leaders… If something goes wrong, you throw up your hands in angst and if something goes right, you're quite happy. It's a roller-coaster. It's just chilled. It's a different picture.

GUGULETHU MFUPHI:  Yes, let's pick your brain on that and your thoughts on the changes we've seen regarding economic cluster in South Africa.

GEOFF BLOUNT: I've just come out of an investment team meeting where we've been trying to just understand. I think it's a shift to the left. Putting Pieterse into Energy – a supply side thing – is unfathomable, if you ask me. She hasn't covered herself in glory (and this is in other areas). She's the ex-Minister of Fishing and Forestry. You have some strange appointments on not fixing the supply side of things, which I just mentioned. I think we are getting indications further to the left. This is a slight step to the left. If anything, it's just more of the same. I think it's too early to say in terms of the Cabinet. We need to work hard to fix our issues. They always say Cabinets are political appointments. The DG's are the critical people behind them. The lessons we need to take from Brazil is get the social stuff right, get education right, drop those inequalities, and get services into poor areas, because this is what they did. I was in Rio for a few months when the army took occupation of all the favelas around Rio. The military invaded these places, occupied them, and there were door-to-door sweeps for weapons, guns, and drugs, and then put in a social structure with this invasion. They called it pacification or the pacifying of the favelas, but it came with social support and I wonder whether in our areas here, where you have high degrees of social delivery frustration that you need to come in with a marshal plan as well. You need to go into these areas – there are massive problems – and deal firmly (literally) – and then delivery. It doesn't help to go in, pacify, and quell without them backing it with the people on the ground saying 'hang on. I'm important, the people in government care for me, and they're going to make sure I get service delivery. I'm going to get my services and education'.

GUGULETHU MFUPHI:  Some serious challenges that we have on the local front, as well. Thank you so much. That was Geoff Blount, the Chief Executive of Cannon Asset Management.