Pulled by Gravity: Brazil’s Investment Ventures to Africa

 

 As Africa is seen as the “next frontier of growth,” the world’s focus on their economic engagement with the region has tilted. Now, investment is the buzz word. Foreign governments and companies are venturing in this new race to what was once considered as an elusive development.

“Africa is no longer an object of our fears or hopes or pity.”

Brazil has emerged as one of the key partners of trade and investment with Africa since the Portuguese empire era. Their economic partnership has flourished as trade between this largest nation in South America and the African region expanded from $4 billion in 2002 to $20 billion in 2010. Although it remains a fraction of Brazil’s total international investment, the country’s investment outflow to Africa has significantly increased within the last decade. The African Development Bank reports that Brazil’s total investment in Africa surpassed $10 billion in 2009.

High Returns of the “Historic Debt”                  

The former president of Brazil, Lula Da Silva, once postulated that his country has “historic debt” to Africa, referring to the Portuguese empire’s transatlantic slave trade that once linked Africa and South America. Bearing this in mind, a question arises of whether such benevolence is the drive behind the increasing number of trade and investment with African countries. Common presupposition might juxtapose the causality with the abundant endowment of natural gas and oil that Africa contains. However, Brazil is already a resource-rich country and a major exporter of oil itself. Thus, what are the possible alternative explanations behind such an engrossment?

Based on the renowned Gravity Equation, it seems like Brazil’s investment falls into the right place. Gravity theory in economics posits that the decision of a country to trade and invest at both intensive and extensive margins is influenced by market size and location between the trading countries. Although for generations we have been accustomed to perceiving Africa as merely “a quagmire of famine and genocide”, some of the countries in the region have actually been growing rapidly.  In fact, six out of the 10 fastest growing economies in the world from 2001 – 2010 are the African nations. These countries have exponentially augmented their market size and diversified the sectors. Home to a growing middle class, Africa is projected to have 1.3 billion consumers by 2030, with $1 trillion-worth expenditure by 2020. For Brazil, this growing market is only at the other side of the South Atlantic Ocean.

“The South American economy is seeing Africa as a means of diversifying its export markets — for food, seeds, agricultural machinery — and internationalizing the production of its big companies — Petrobras in the oil and biofuels business, Vale in the mining business.”

In addition, Brazil has a strong cultural trajectory with Africa, as it is the largest country outside of the region to host Afro descendants. Like Brazil, many African countries were colonized by the Portuguese, and today, this cultural affinity has been capitalized by Brazil as most of the inroad works in Africa have been conducted in Portuguese-speaking countries, such as Angola and Mozambique.

One equally important explanation is more political in nature. Africa can serve as a platform for Brazil to expand its global influence. Under the leadership of Lula, Brazil remarkably opened 17 new embassies on the continent. The former president of Brazil also extensively visited 21 countries during his tenure. Furthermore, Brazil has carefully constructed their public profile in Africa in order to avoid being labeled as a “resource-hungry” imperial power, in which both former president Lula and current president Rousseff have criticized China’s approach in engaging with Africa.

 “Resuscitating Africa”: Can Brazil venture the high seas with a small boat?

If Brazil can profit through investing in Africa, can such benefits be reaped mutually by the receiving end? Although Brazil’s investment, if compared to China’s, seems like a blip in the radar, it can potentially deliver auspicious gains for the people where Brazilian companies locate or invest in Africa.

First, Brazil has a commitment to employ local population, as stated by Rousseff during her trip in Angola. A World Bank report suggests that Brazilian corporations are hailed due to their approach in doing business in Africa, in which they tend to “develop local capacity”. Odebrecht, a giant company from Brazil, for instance, is currently one of the largest employers in Angola. The corporation has also been lauded for their HIV/AIDS awareness program in the aforementioned country.

Second, it allows for transfer knowledge in which Brazil can be a model for Africa in its efforts of reducing poverty and developing their agribusiness sector. Brazil is renowned for its cash transfer payment, Bolsa Familia program which some argue has supported Brazil in lifting 20 million people out of poverty. In addition, Brazil’s success story of “integrating key agricultural value chains” can be an inspiration for Africa’s agribusiness sector to emulate.

The future of this dynamic engagement remains to be seen. Tensions in some countries, such as Mali, posit a real threat to Brazilian investors within the country and might have negative spillovers to other countries on the continent, but might well not be enough to brush the Brazilian juggernaut away. Also, it will be interesting to see who will come out “victorious” in the investment race as more and more players are vying into this opportunity despite the potentially high risk. However, coming with a sensitive strategy that emphasizes local engagement, Brazil’s small boat might not only be welcomed with open arms, but one day, it might also sail ahead of the others, including China’s flagship.

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