Adventures of a Gringa

The Brazilian Saga

You can read hundreds of news stories and dozens of books about Brazil's global rise as an economic powerhouse, but I've read few books that come close to putting in such sharp perspective how far the country has come as with Saga brasileira, by one of Brazil's most famous economy reporters, Miriam Leitão. There's a possibility you have opinions on Leitão, but either way, it's worth putting them aside for the sake of the book. While I think it could potentially be interesting for Brazilians, especially for econ nerds and those who were born after the worst of the economic crises, it may not be that much of a revelation. But for foreigners who work with Brazil, live in Brazil, or have any sort of interest or stake in Brazil, you really should read this book.

First, just be warned that it is heavy on lots of economic nitty gritty details, though fortunately there are interesting narratives in between. The other thing to know is that there were occasionally times where on one shoulder, there was a little Alex Castro, rolling his eyes and muttering "Classe média sofre," and on the other, a little Reinaldo Azevedo, yelling in all caps "QUE PAÍS É ESSE?!" Because there are some parts where, for example, the author tells anecdotes about families who suffered from the country's economic woes that you don't feel terribly sympathetic to, such as a couple who couldn't take their honeymoon in Bariloche and instead had to take it in Brazil--a story she mentions not once, but twice. This is a book written by someone of privilege for people of privilege, and that's very clear, so you just have to take it in stride. But there are also some shocking tales, such as grocery stores running out of stock during they hyperinflation years, or of just how disorganized the country's federal financial institutions used to be, that are quite eye-opening. And the last thing to keep in mind is that as far as non-fiction goes it's not the greatest; the narrative doesn't always seem to be coherent and sometimes skips around a bit, but this is the type of book you can read gradually in little chunks. (Also, it's in Portuguese, and I don't think there's an English translation available.)

The moral of the story is that Brazil's economic rise stems from finally succeeding in creating a stable currency, a long-fought battle after years of hyperinflation and 8 different currencies since the 1940s, as well as the battle for economic coherence and reforms in the federal government. Leitão touches on other important factors as well, including a drop in fertility and the creation of key social programs. She also puts Brazil's rise in historic perspective, demonstrating that it was a much longer process than commonly belived and that the country experienced other consumer booms in the recent past. But it really is worth dedicating a book to the fight for a country's currency, a fascinating and sobering tale that really is foreign to those of us who haven't experienced hyperinflation.

For Americans in particular, the concept of money is something practically sacred; despite the 2008 crisis and other economic busts, it's pretty much unthinkable to imagine using anything else other than the dollar. But in my lifetime, Brazil has gone through six currencies, from the cruzeiro (1970-1986), to the cruzado (1986-1989), to the cruzado novo (1989-1990), back to the cruzeiro (1990-1993), to the cruzeiro real (1993-1994), and finally, to the real. The story of how Brazil "won" its currency and beat hyperinflation, as well as the brilliant plan to make the switch to the real, really is an incredible saga.

It's hard to imagine what it was like during the time of triple-digital inflation, but Leitão gives you a pretty good perspective. Housewives would have to use price tables to figure out the values of food at the supermarket, which during some periods changed daily. In 1993, the minimum wage was initially set at 4,693,800 in cruzeiro real, but was the equivalent of US$64. Because inflation rose so quickly, "people lost the notion of the connection between the value and the price," Leitão explains. She recalls buying a VCR for 470,000 cruzados in 1988 and buying another VCR for 18,000 cruzeiro real in 1993, and of having credit card bills of over 1 million in 1985. "We lived in the Middle Ages," one businessman remembers. Meanwhile, a bank manager who was arrested when her branch ran out of cash in 1990 commented to Leitão, "Brazil hasn't had a war? It has, yes--a psychological war. We all participated in the war of the economy."

Leitão closes the book quite beautifully, explaining that it's not only important to remember and reflect on Brazil's economic past, but to learn from how Brazil treats its history. "Brazil has a strange tendency to erase the brightest colors of its history, as if it needed sepia tones to recognize itself as [having] a cordial people. But our merit is another: to overcome our traumas, even when they are difficult and painful." She warns that one of the real enemies is complacency, and that it was a mistake to accept rising levels of inflation, just as it is a mistake to accept corruption today. "We lost the notion of value and price in the economy during hyperinflation, like today we are losing the notion of values and preserving the quality of our democracy. We are not condemned to clientelism...nor to corruption."

Because there's so much to discuss from the book beyond hyperinflation, I'll come back to it later in separate posts about specific topics about Brazil's transformation.

Q&A With Brazilian Bubble

Over the past few weeks, there have been foreboding blips in the media about Brazil's economy. There's one story about the problems with Brazil's dependence on China, and another about the commodity slowdown and "the end of Brazil's magic moment." There was a bleak Foreign Policy piece called Carnaval is Over, predicting that Brazil's boom is coming to an end. There was also an oddly named op-ed in The Telegraph called Swimming naked in Brazil's bubbly waters, warning about possible credit and housing bubbles. And there was also a brief note in today's Estado de São Paulo that says Brazil is getting close to its consumer debt limit. It's not the first time analysts have predicted bubbles in the Brazilian economy, which some economists have assured won't happen. But there are signs the economy is slowing, despite strides that ensure Brazil will remain one of the world's largest markets.

When trying to figure out what's going on with Brazil's economy and understanding the dynamics of how things work, I've found that one of the best places on the web is a blog called Brazilian Bubble. There, you can read realistic, concise, and entertaining coverage of Brazilian economic, financial, and business news. Plus, it's way beyond bubbles, with everything from how Brazil's development bank works to the latest mergers to analyzing inflation numbers. It's not all gloom and doom; they focus on all aspects of the economy, both good and bad. Run by a small group of Brazilian and American business professionals, they'll change the way you think about Brazil's economy. (Because they like to keep their day jobs separate from the blog, they prefer to keep their names anonymous.) Even if you don't agree with everything, their perspective is invaluable to figuring out a market which, like the country, is not for beginners. I spoke to the Bubble guys about the blog and their thoughts on a number of critical issues affecting Brazil's economy.

What's the idea behind the blog, and why did you decide to start it? What kind of feedback have you received?

The blog started as a joke between friends: some of us thought Brazil was experiencing a real estate bubble and some didn't. So we bought the domain for fun and started re-posting cool articles about Brazil from other websites. All in English, as we didn't want to limit ourselves to the Brazilian border. It started with real estate, but then it went to stocks, economy, culture...pretty much a mix. It's important to not take life too seriously. Serious subjects like business and finance should also entertain the readers, so we like to treat everything with a flair of humor. The truth is that we love our Brazil, and we criticize things that most Brazilians do: high costs, bureaucracy, politics, corruption. But at the end of the day, our focus is business and finance, and we feel our site plays in a niche market not explored by others. The feedback we get from our audience is the best possible... we receive emails from avid readers (including high-profile economists) who tell us that they love the site and all. That is good fuel to keep us going, despite a couple of naysayers.

What's your outlook in terms of high costs of living and real estate in Brazil?

Our thought is that there is in fact a real estate bubble in Brazil, but it doesn't mean it will pop tomorrow. As long as there is credit flowing into the system, it can keep going for a while. But the truth is that real estate prices in Brazil have been increasing at a faster pace than inflation for about 50 months in a row. And as the economist Robert Shiller says, although there are moments of euphoria and depression in any housing market, in the long run prices adjust to inflation. Hence, in our opinion, a price correction will take place; it can take 6 months, or it can take 5 years, who knows. Regarding high costs in Brazil, we always discuss this at the blog. It gets more expensive by the day, but Brazilians seem to be willing to pay the price, as long as they can pay for the monthly installments. A friend told me recently that her housemaid makes about R$650 a month and, surprisingly, she was approved for a motorcycle loan that has monthly payments of R$270! Isn't that crazy?

You've written quite a bit about the BNDES. What's your take on it, and is this kind of lending sustainable in the long term?

BNDES is a tool used by the government to lend to businesses and get the economy going...fine. In theory, that role would have been better played by the private sector, which is more efficient, as you don't get the public machine to play politics. But the major private banks in Brazil won't lend...they are too lazy to take risks as long as they keep making money out of high interest rates. They simply have no incentive to lend more. So that's why the government in Brazil plays a crucial role in lending; just ask Guido Mantega how mad he is at the private banks because they resist lowering their lending rates. So, for now, BNDES, Caixa and Banco do Brasil should keep playing that role. Our criticism comes when politics are at play. Why keep lending to Odebrecht, OGX, and Petrobras at less than 5 percent, and not to millions of small businesses? Why keep making the same guys rich over and over again, when there are so many savvy entrepreneurs in Brazil that need that extra push? Brazilians are incredibly creative, but there is no money for them to explore these possibilities. I think it is easy for Eike Batista to write a book saying how Brazilian entrepreneurs could be like him, but no entrepreneur has the leverage in the government that he has. An average entrepreneur doesn't play politics - he is just worried about growing his business, and for that he needs to borrow at low rates. Is there a "Bolsa Familia" for that?

There's a lot of promise in the oil and gas sector but it seems there's going to be a lot of delays in terms of exploiting the pre-salt reserves. How long will it take for Brazil to become a global oil power?

Brazil is already an oil power: it is self-sufficient. How many countries can afford to have that? It is just that (again) the government is in the middle of it, which makes the whole system inefficient. And the government is also dictating how it wants Petrobras to explore its reserves. It gets very hard to get the right execution, efficiency and costs if you have the public machine dictating how to do your job. The market forces cease to exist, costs go up, and delays become a common trend. The government needs to get out of the way and let Petrobras run the show. It is great company but its biggest shareholder is the government. I think Brazil will have its challenges, but if it manages the process well, it can get it right. Only time will tell. It needs to be a private initiative, with some help from the government, not the opposite. It is that famous question: does Brazil wants be more like Norway or Nigeria? One of them is totally market-driven, super efficient, invests wisely, and puts its oil revenue in a well-managed sovereign fund. The second, Nigeria, needless to say anything. Same for Venezuela.

Productivity seems to be one of the biggest economic hurdles in Brazil that isn't discussed as often (though you guys do, of course). What do you think keeps productivity low in comparison to other developing markets?

We've talked a lot about this; it is a sensitive issue to us. Believe it or not, over the past 30 years, worker productivity in the Brazilian manufacturing industry fell 15 percent. When we read these kinds of headlines it makes us wonder what the hell happened to our Brazil... it almost seems like a group of people that should be worried about this were sleeping at their jobs for 30 freakin' years. While these guys were sleeping, China's productivity rates went up 808 percent in that same period. The main issue, besides the urgent need for investments in education and infrastructure, is that Brazil is a closed country. If you don't open the country, the local companies will have no incentives to invest, educate the workforce, trim costs, and make better products. Competition is everything: it is good for consumers, it is good for companies, it is good for the market. Just see the Americans - they have access to good quality products at low prices, while in Brazil is the complete opposite. Brazil needs to be more open, but it seems to be doing the exact opposite by taxing every import. Sincerely, that's a huge turn off.

Taxes and bureaucracy are among the most talked about economic hurdles in Brazil. Which realistic steps could be taken to alleviate Brazil's tax burden?

Shrink the government and fight corruption...but of course it won't happen in our lifetimes. Brazil needs reforms, but there is not a lot of people in the government with the energy and the will to do that. They will prefer to focus their efforts on making the most for their own self-interests, period.

Interview with Kenneth Rapoza

I had a chance to catch up with Kenneth Rapoza recently, who told me about his time in Brazil and his thoughts on the Brazilian economy. Ken was a staff reporter based in São Paulo for Dow Jones, where he wrote daily for the newswire. He wrote for the Wall Street Journal and Barron's from 2005 to 2010. He currently manages and writes for Forbes' BRIC Breaker blog, covering Brazil, Russia, India and China.

Ken lived in Brazil for 10 years between 2001 and 2010. He lived in São Paulo, in the Higienópolis neighborhood. "For me, a gringo, it was totally exotic and the kind of glamour I could have never afforded in the U.S.," he recalls. He misses catching a glipse of parrots on his way to work. He has fond memories of the city, though he doesn't miss the traffic. He also remembers the excitement of living historic events, like Lula's election victory.

He had the opportunity to travel all over the country, and his favorite places were Rio de Janeiro and the Panatal. "The Pantanal was great for its natural beauty. I woke up at around 4:30 in the morning to large hyacinth macaws. I really felt like I was in a jungle there," he said. However, when asked about misperceptions foreigners have of Brazil, he explained: "Manaus has more people than the city of Boston and it is smack dab in the middle of the biggest rainforest on earth. Also, Brazil is home to Embraer and can actually make amazing jet aircraft, not just FIFA stars. I don't think people realize that when they are flying from New York to Boston they are probably flying something Made in Brazil." 

I asked how Brazil stacks up to the other BRICS in terms of the economy and growth. He said: "All four are so different from each other it is hard to compare. I think Brazil is way more diverse than Russia, and in this regard it is probably closer to India. China is more export-driven, but trying to turn inward. Brazil already has a decent domestic market and that is growing. Brazil has a lot of know-how; they're very innovative. It's just so hard to compare all four of them together." He also sees them differently in terms of culture. "Who has better clothing designers? Brazil. Who has better musicians? Brazil. But who has better filmed entertainment? India and China. Brazil still relies on Hollywood and Globo novelas."

He weighed the differences between the countries. "Is Russia more innovative than Brazil? Well, Brazilian aircraft are certainly better than Russian aircraft, and the market will tell you that. But Brazil doesn't have an international cyber security brand like Russia has in Kaspersky Lab, for example. Or an IT leader like Infosys or Wipro in India. What does China have that Brazil doesn't have? Well, it's created their own Twitter/Facebook hybrid called a Weibo, by SINA Corporation. Brazil doesn't have that. They adopt U.S. consumer technology, but they invent other kind of technology. Brazil does elections on line, and its banking IT infrastructure is incredible. So everyone is different."

He also believes Brazil benefits from having more ties and similarities to North America. "I think the advantage of Brazil over a place like Russia, China and India is that Brazil is way more diverse than all three. And it is more hospitable than Russia. Russia really is another world. There are zero American references there, which is fine. But Brazil is more gringo friendly." On Brazil's other development advantages, he pointed to low-cost electricity and hydroelectric power. But, he said, "the disadvantage is you have to build hydroelectric dams and there is really only one place to build them--in the Amazon."

He went on to share his thoughts on Brazil's oil sector. "Brazil also has this pre-salt deep ocean drilling capabilities and know how that could turn Rio into Oslo if they play their cards right. By that I mean that Rio can be a third center of oil services in the world, outside of Norway and Houston, Texas," he explained. He believes Brazil's oil wealth is an important advantage. "Brazil is raking in a lot of foreign capital because of the Santos and Campos basin discoveries by Petrobras. "There's a lot of know-how that is going to come from that on all fronts. It is going to be a very costly venture and everyone knows that. The disadvantage is that it is oil and oil can spill, and when it does off the coast of Rio, it could be a super mega disaster. Chevron is feeling this now and their November 2011 oil spill was miniscule (2,400 barrels with no oil on shore, no wildlife or human casualties) compared to BP's oil spill in the Gulf of Mexico. That is a disadvantage. Because God forbid something more severe happens. You will have a lot of money tied up to drill deep through the bedrock of the Atlantic and the political risk is that the government says, 'Okay, everyone just go home.' Petrobras can develop it itself, but not on the scale they could with partners."

This Week's Reads

It's been a busy week, and I'm going on vacation tomorrow, so I apologize for the sparse posting. But there should be two really interesting posts up next week!

Here are some good reads I came across this week, which you can also see on Twitter.

Being There: São Paulo, More Intelligent Life

A great piece about a foreign correspondent adjusting to life in São Paulo.

Excerpt: "Still, São Paulo is a great place to be seeing out the global recession. Brazil’s economy is booming, and much of the benefit is being experienced lower down the income scale. My boss...who lived in São Paulo in the late 1990s, says that better diet and greater self-esteem mean that poor Brazilians stand noticeably taller now. One private-equity dealmaker told me his family’s maid and nanny have both started to sell cosmetics door-to-door in the evenings. He doesn’t think either will still be with him in six months. To hear a Paulistano complaining that you can’t get a good maid these days is to be reminded of Bertie Wooster’s constant fear that one of his friends would poach Jeeves. São Paulo is in the throes of a full-blown Servant Problem, and I feel privileged to witness it."

In Pockets of Booming Brazil, A Mint Idea Gains Currency, Wall Street Journal

A fascinating story about the growth of local currencies in Brazil. I'd read about the Cidade de Deus bills, but didn't realize it was a national phenomenon.

Excerpt: "The capivari is one of 63 local moneys—including bills named after the sun, cactus and the Brazil nut—now circulating in needy neighborhoods throughout Latin America's biggest economy. The idea is gaining currency as towns seek a share of current economic growth. This month, a new local currency hit the streets in Cidade de Deus, the Rio slum that was the subject of a blockbuster film and a stop on President Barack Obama's South American tour this year. While equal in value to the real, local currencies gain traction because local merchants offer discounts when using them. No one is forced to quit the real, but shopkeepers say greater volumes make the markdown worthwhile."

How Brazil Is Sending 75,000 Students To The World's Best Colleges, TIME

An interesting piece on the Brazililian government's study abroad plan.

Excerpt: "With their economy booming...Brazilians have gotten used to going abroad for tourism, business, shopping and diplomacy. Now their students are finally getting an incentive to see the world, thanks to a major government program that aims to award 75,000 scholarships to attend the world's top universities. Available only to Brazilians studying subjects of strategic national importance, like engineering, they reflect 'an effort by the government to take a quantum leap in the formation of a scientific and technological elite,' says Aloizio Mercadante, Brazil's Science and Technology Minister."

Foreigners in Brazil, Ultimo Segundo

A story about foreigners living in Rio, accompanied by a really interesting infographic of how many foreigners live in each state in Brazil, as well as the number of foreigners by country of origin. The numbers allegedly come from the Ministry of Justice, though some of the countries seem a bit odd (Antarctica? Undefined? Countries that no longer exist?)

In Rio de Janeiro, Juice Bars Are More Than Just Juice, The New York Times

Seth Kugel covers one of my favorite Rio institutions: the juice bar.

Excerpt: "Here’s the key [to cheap eats]: the city’s freewheeling, fast-moving corner juice bars, where countermen take your order and appear to yell it — “orange with papaya, no sugar!” — into a wall of pineapples, guavas, apples and mangoes. A minute or two later, a glass appears from an opening in the wall, filled with ice-cold, frothy, delicious juice. You down it at the counter, and head off to the beach."

Brazil has slower average Internet speeds than in Haiti, says study, Folha

A study of internet speeds across the world found that average internet speeds in Brazil were lower than in average speeds in Haiti, Niger, Ethiopia, Angola, Pakistan, and Papua New Guinea.

Graphic from Pando Networks

The Completely Outrageous Cost of Living in Brazil, Business Insider

An interesting round up of twelve items and services that have high price tags in Brazil.

Defining The Middle Class

Last week, when I wrote about Brazil's new middle class, I included figures that show that this group, largely the C class, is a much different middle class than an American or European one. With monthly salaries between R$1,000 and R$4,000, or US$631 and $2,526, income is just one facet that defines this new mass of consumers. In fact, identity is at the heart of the evolving socioeconomic spectrum in Brazil, as Brazilians try to redefine themselves within a rapidly changing country.

Defining who qualifies as middle class not only depends on the source, but even Brazilians themselves can't seem to decide. According to a recent survey by Data Popular, only a third of those who are considered in the C Class defined themselves as middle class; the other two-thirds defined themselves as "lower income or poor." While most low-income workers defined themselves as such, 55 percent the upper class defined themselves as middle class.

Traditionally, the middle class was something different entirely, and something closer to upper class than working class. There's entertaining insight to this traditional middle class online, with blogs like Class Média Sofre and The Classe Média Way of Life, that mock the tendencies and habits of this group of people. This socioeconomic class would be closer to the B class today: educated professionals who own their homes or rent relatively expensive real estate, who pay for private health care and education, take international vacations, buy name brand clothing, have a full-time maid, and maybe own or rent a second home in the mountains or at the beach. It's a group with disposible income, but one with a heavy tax burden. They tend to be sophisticated and worldly; they likely speak another language, at least on a basic level. The new middle class, on the other hand, has lower levels of education, and tend to be first-time homeowners. They may be taking their first trips abroad, and buying their first washing machines or flat screen TVs. They might send their children to public school, or if they can afford it, to less expensive private schools. They tend to be newer to technology and the internet, and they're far less likely to speak another language.

Given the cultural differences alone, the traditional middle class is very much at odds with the new middle class. As described in this July Financial Times article, the old middle class isn't necessarily overjoyed by the rise of new consumers.

"Unlike in India, where the old middle class benefited from the creation of new industries, such as information technology outsourcing, many in the Brazilian middle class complain of rising prices, taxes, congested infrastructure and increased competition for jobs."

In addition, according to one of the most comprehensive studies on the new middle class by Professor Marcelo Neri at the Fundação Getúlio Vargas, incomes have grown faster and by larger amounts for the least educated members of society, while in some cases salaries have actually decreased among the more educated. Coupled with inflation and a rising cost of living in cities, the traditional middle class can even see itself as at odds with the new middle class.

The traditional middle class sometimes looks down at what is now the new middle class, and some in the traditional middle class would consider themselves "culturally superior" to the new middle class: more American, tech-savvy, and literate than a more Brazilian pop-culture, newer to technology, and less well-read (or with little access to books). A traditional middle class teenager, for example, might look down on a new middle class teenager for liking sertanejo (Brazilian country music), rather than say, White Stripes, and Brazilians who have been on Facebook for years complain about the "Orkutization" of Facebook by the new middle class. It's the same dynamic you might find between urban yuppies in the U.S. and lower-income working class Americans living in rural areas, but more acute and on a deeper level, since the two groups co-exist and interact.

A key example of the divide between the traditional and new middle classes is clear in this recent article from Época Magazine, where a São Paulo marketing consultant claims to debunk the "myths and truths" of the new middle class. The traditional middle class can sometimes show disdain for Northeasterners, from the poorest region of Brazil. This type of attitude is implied - he claims the Northeast is where the "real" C Class lives, and goes on to explain that they have different consumption (and cultural) habits than the middle class in other parts of the country. But he also makes some good points about why it's important to understand the C class from a realistic perspective: "These guys were living in poverty until recently. They were going hungry, and now they have a plasma TV in the living room." And he also asserts that because of this diverse middle class, Brazil "is in search of a new identity."

Meanwhile, despite the cultural divide between the traditional and middle classes, one thing they have in common is the empowerment of women, a factor that is too infrequently credited for Brazil's economic growth. In this excellent article from National Geographic, Cynthia Gorney explains why fertility has dropped across the board in Brazil. It's not just smaller families that are helping women excel - with more educational opportunities and job prospects, they're flourishing. Women with previously little access to the formal job market are now entering in droves. As this BBC article about domestic workers explains:"Even with a basic education, job opportunities in supermarkets, telemarketing, cleaning companies, restaurants and offices beckon for women who would previously have worked as home helps for a middle-class family."

In a recent article for the Christian Science Monitor, friend of the blog Julia Michaels profiles a typical member of the new middle class: a woman who previously lived in a favela, received job training, and now earns US$1,000 a month working at an Ipanema spa. After getting help from her friends and family to "pad" her bank account, she was able to afford to buy her own home. She owns a computer and sends her two daughters to private school. It's really illustrative of the changes of the new C Class, and indicated that culture and identity will change as incomes rise and opportunities grow.

It's useful to have a realistic perspective on Brazilian social classes, since the media often provides a confusing view on what it's really like, especially with all of the excited and sometimes overblown talk of an economic miracle. The most recent example is this New York Times article from last weekend, heralding the influx of foreigners in Brazil, chasing the country's economic boom. It only glossed over the fact that many of these foreign workers are getting hired instead of Brazilians, either because of a lack of skilled local workers or because some firms prefer to import managers from the US and Europe. It also briefly mentioned that more educated Brazilians are returning to Brazil looking for jobs, a reverse brain drain, and are sometimes finding themselves competing with highly-paid foreigners with hefty relocation packages. It failed to mention altogether than the vast majority of the work visas issued are temporary, for between 90 days and 2 years, and less than 4,000 work visas were extended in 2011 (meanwhile, nearly 25,000 temporary visas were issued this year, over half of which were for a stay of one year or less). This means that while Brazilians coming home from abroad are coming for good, many foreigners coming to work aren't relocating permanently - at least not officially.

Finally, it's important to understand the financial limitations of both the new and traditional middle classes: namely, a high tax burden, inflation, and a rising cost of living, all of which reduce purchasing power and increase consumer debt. This week, UBS released its cost of living study, which showed that despite rising salaries, Brazilian purchasing power has actually declined. It is now as expensive to live in São Paulo as it is to live in New York, but salaries in São Paulo are 61 percent less than in New York. Similarly, the cost of living in Rio is amongst the highest in the hemisphere, but Rio salaries are 66 percent less than New York salaries. (Read the full report here)

So what does this mean for the middle class? The culture gap betweeen the traditional and new middle class will likely persist, but the new middle class is challenging perceptions about how increased access to higher salaries, skilled jobs, and increased consumption can change a person's standing in a country that has historically been highly stratified, and where social mobility wasn't always easy. It will be interesting to see how people self-identify in five years to define what the Brazilian middle class has become.

The New Middle Class

One of the most impressive results of Brazil's economic rise has been the explosion of the middle class, and the expansion of what is called the C Class. Beyond the stock market, the oil fields, and the upcoming international events, the new middle class is what really has helped fuel growth and has attracted so much investment and international business.

In Brazil, socioeconomic level are divided by letters: A and B (upper income), C (middle income), D (lower middle income), and E (low income). This week, a new government study from the Strategic Affairs Secretariat (SAE) was released that provide insight into the new middle class, and provides an interesting look at Brazil's biggest consumers. One of the authors of the study discussed the rise of the middle class earlier this year:

The middle class now encompasses 52 percent of the Brazilian population, with around 95 million people. A new middle class family earns between R$1,000 and R$4,000 per month, or US$615 and US$2,461. The average monthly salary for a middle class family is R$2,295, around US$1,412, which amounts to about US$18,356 a year (including the "13th" bonus salary). Most are urban dwellers (89% live in cities) and largely concentrated in Brazil's wealthier regions (the South, Southeast, and Central-West). The majority are adults (63 percent are over 25), and slightly more than half are female and white. Amongst those in the C Class, six out of ten are employed. Plus, the rise of women in the workplace and higher education levels have helped propel families into the C class.

Brazilians from the new middle class are spending record numbers on consumer goods and services, and are expected to spend US$1.5 trillion in 2011. Shopping malls, which have becoming increasingly popular in the last few years, are mushrooming all over the country. This week, BR Malls acquired four new malls, and has plans to expand to Argentina and Chile. Also this week, Australia's Westfield Group purchased a 50 percent stake for US$440 million in Brazil's Almeida Junior Shopping Centers. Companies are opening offices and turning their focus from the U.S. and European markets to Brazil. As this LA Times article explains, companies disappointed with zero growth in the US are expanding to Brazil where opportunities for new investments abound - particularly with middle class consumers.

So what are they buying? Just about everything. According to the study, the new middle class spends around 31.5 percent of their yearly budgets on expenses for the home, which include bills, repairs, and big purchases like TVs and computers. They spend about 23 percent of yearly budgets on services, including beauty salons, housekeepers, and government services. About 18.5 percent is spent on food and drink. A few other interesting numbers: the C Class is responsible for 48 percent of supermarket purchases and 60 percent of beauty salon expenditures; members of the C Class make up 70 percent of Brazilian credit card holders and 80 percent of Brazilians who access the internet. For the new middle class, two of the main aspirations for purchases are cars and homes.

One of the most notable consumption trends in the new middle class is travel - now more than ever, Brazilians are going abroad and are spending billions. As the U.S. Ambassador Thomas Shannon noted at the Council of the Americas conference in São Paulo this week, "Brazilians travel with almost fanatical zeal to the US." In the first six months of 2011, Brazilians spent US$10.18 billion abroad, an all time record and a 44 percent increase from the same period the year before. This June alone, Brazilians spent US$1.8 billion on international travel. Many travelers are coming to the United States, much to the delight of embattled retailers. Miami is a popular shopping destination, and in 2010, 550,000 Brazilians visited the Florida city, spending US$1.14 billion there. Some even come with actual shopping tours. Wealthy Brazilians are buying up Miami real estate; as one broker told The New York Times, “The Brazilians walk in, they don’t even negotiate...It’s a no-brainer for them.”

But with this massive group of new consumers whipped up in a spending frenzy, debt is a real problem, and luckily the government is concerned. Ensuring education about credit and expanding unemployment insurance, amongst other measures, will be key in the sustainability of development, noted an EXAME article this week. Also, The Guardian revealed new consumer debt numbers this week:

"...A current representation of traditional Brazilian financial mismanagement is the high level of indebtedness of its families, which reaches 65% on average in the main cities of the country. In Curitiba, for example, the average level of indebtedness of its families – according to the Brazilian Federation of Commerce – has reached 88%. In Natal, the capital of Rio Grande do Norte, 40% of the family income is, on average, committed to debts. In the last year, 10 Brazilian states...were showing levels of indebtedness of its families beyond 70%. In 2011, at least 15 states are in the same situation."

There are also American-style heath problems - as the middle class has grown, so have Brazilian girths: nearly half the population is overweight, and childhood obesity has more than quadrupled in the past two decades.

Despite gains in salaries and purchasing power, the new middle class still falls behind the upper classes in access to education, services, sanitation and culture. A 2009 study found that while 87 percent of the upper class finished high school, only 59 percent of the middle class completed a high school education. The latest SAE study found that the middle class typically spends less than 30 percent of what the upper class spends per month on leisure and culture. While over 80 percent of wealth households have landline phones, less than 50 percent of middle class homes do. Seventy-two percent of upper class homes have an internet connection, compared to only 30 percent of middle class households. Nearly all wealthy households have adequate sanitation, compared to three quarters of middle class homes.

These challenges will very likely recede over time, assuming real wage growth and low unemployment hold. Brazilian middle class salaries are lower than in developed countries, which would be less of an issue if it were not for inflation, a high cost of living, and extremely high prices in major cities. Aside from reigning in consumer debt, striving to keep prices within a reasonable range of middle class salaries will help sustain this enormous contingent of consumers fueling Brazil's booming economy.

Brazil's Economy: The Good and the Bad

Observing the drama that is the US and Brazilian economies is a bit like a tragicomedy: while they seem to be polar opposites of one another, the trends in both markets are unsustainable. In the US, the media would have us believe we're on the brink of certain disaster, as high unemployment, a pessimistic outlook, and sluggish consumption have kept the economy stagnant. Meanwhile, in Brazil, the picture is much rosier - at least on the surface.

Unemployment is at an all time low, and fell to 6.2 percent in June. Consumption continues to rise, and retail sales grew by over 5 percent since the beginning of the year. Brazilians are highly confident about the economy, and a majority have a positive outlook. The automobile industry is booming, and Brazil is expected to soon become the world's third-largest auto producer (despite the fact that Brazil is one of the most expensive places to buy a car, and in some cases, a Brazil-produced car costs more domestically than the same model exported to other countries). Though Brazil has the most overvalued currency in the world, government officials today expressed confidence that it's a reality that will be handled. To help protect domestic industry from cheap imports, the government announced the Brasil Maior plan this week, with $16 billion in tax cuts and protective measures for local industries. The plan will benefit companies ranging from shoe producers to software companies.

But there are still signs of trouble lurking. Bovespa, the Brazilian stock market, has performed poorly all year, and Brazilian companies have lost R$262.8 billion in market value in 2011. Bovespa plummeted this week with declines in stocks for several major companies, including Eike Batista's MMX, Petrobras, Vale, and Gol Airlines. The IMF warned this week that overheating may be on the horizon, citing growing credit and rising inflation as worrisome indicators.

Still, the most troubling trend continues to be consumer debt. Last week, The New York Times published a story about predatory lending in Brazil and Chile, and several studies indicate consumer debt is rising fast. One study reported that over 63 percent of Brazilian families are in debt, and that nearly 18 percent of families are in deep debt, a three percent rise from July 2010. According to this article, a São Paulo study found that over 50 percent of families are spending more than they earn, and an IBGE report found that "75 percent of Brazilian households find it difficult to pay their bills and don’t have enough money to reach the end of the month." Defaults are at a nine-year high, and are expected to rise this year to 8 percent. Another study released today by Ipea showed that 32.8 percent of Brazilians are unable to pay their debts, and that in July, the average debt rose to R$4,433,65. Only sixteen percent say they will be able to completely pay off their debts, and 43 percent say they will have enough to pay off part of their debt.

There are plenty of questions. Will the supposed cooling dampen consumer confidence? How long will the spending bonanza last? Even if the economy holds strong, what will happen to those in debt? And finally, será que os consumidores brasileiros irão aprender a lição da desgraça dos consumidores americanos?