On March 2, 2007 “Brazzil” magazine published the original article of this series of articles about Brazil and China: “Here Is Why Brazil Should Adopt the New Asian Currency.”
As a follow up to that article about the growing economic connection between both countries, we have this new article: “The Smartest Thing China Could Do Right Now: Invest US$ 200 Billion in Brazil.
China’s foreign exchange reserves
On January 15, 2007 the People’s Bank of China announced that China’s foreign reserves had reached $ 1.07 trillion U.S. dollars at the end of 2006. During 2007 China should receive a fresh increase of around $ 500 billion US dollars to be added to its foreign exchange reserves. Approximately 80 percent of Beijing’s foreign exchange reserves are held in U.S. denominated assets.
As of the end of 2006 China was holding over $ 850 billion in U.S. dollars assets, and during 2007 that amount should increase by another $400 billion US dollars – to a new adjusted total of $ 1.2 trillion U.S. dollars. .
In the first quarter of 2007 alone China saw its foreign exchange reserves increase by $136 billion to a total of $1.2 trillion dollars, and in the second quarter the reserves increased by $131 billion dollars to a new total of $1.3 trillion dollars. By the end of 2007 China should have approximately $ 1.6 trillion dollars in total foreign exchange reserves. But it is estimated that China does not need more than half that amount to be able to protect their currency in case of an international monetary crisis.
That means that China will have about $800 billion dollars to be used for domestic investments, and also to diversify into other currencies such as the yen and the Brazilian real. Chinese diversification of several hundred billion dollars into yen, and the Brazilian real would promote the long-term Chinese national interests and it would be a smart way of securing strategic resources such as securing a reliable source of food supply (Brazil) and new technology (Brazil and Japan.)
The Chinese have been expressing their opinions on Chinese Internet message boards, and they have criticized the government for helping U.S. taxpayers and homeowners by investing hundreds of billions of dollars in U.S. Treasury bonds and mortgage-backed securities, instead of spending the money at home in infrastructure and social programs.
China’s new Sovereign Wealth Fund
In early March 2007, China’s Finance Minister Jin Renqing confirmed reports about China's plan to set up a specialized agency to invest a portion of the country's hefty foreign exchange reserves. Jin said the State Council had decided to divide the country's foreign exchange reserves into two parts: "normal" reserves and money to be used for investment seeking "more profits."
On March 9, 2007 Bloomberg News reported that Lou Jiwei, promoted to deputy secretary of China's cabinet, will head a new government agency to manage part of the nation's currency reserves, a central bank adviser said.
…China's new investment company should focus more on securing strategic resources and technology, and not on the financial markets,'' said Zhong Wei, director of Finance Research Center of Beijing Normal University.
China is setting up a new investment agency to seek higher returns on its foreign currency reserves – when these investments are made the new agency will take in consideration its risk factors, and the long-term efficiency of management and the results of investments’ returns.
I would suggest to Mr. Lou Jiwei, the new investment manager of China’s new investment agency, that China should consider investing up to $ 200 billion dollars of China’s pool of investment money in Brazil.
To keep competitive in the global economy Brazil needs to invest more than $ 500 billion dollars in its economic infrastructure over the next ten years – and almost half that amount could be supplied as long-term loans from the Chinese government.
China is seeking to invest its reserves more effectively to support its’ long-term economic growth, and China's new investment company will focus more on securing strategic resources around the world – and there is no better investment for China than investing in Brazil to achieve their goal of securing long-term strategic resources.
The Chinese Central Bank would have to sell over a period of time some of those dollars that they are holding today as part of their foreign currency reserves to be able to buy the Brazilian currency, the real, when they decide to invest their money in various Brazilian projects.
But when they start buying so many Brazilian reais over a certain period of time, by selling the current US dollars held by the China’s Central Bank, that currency transaction would affect the value of both currencies; the value of the Brazilian real would go up in relation to the US dollar. I am aware that this large inflow of long-term Chinese investments into Brazil would affect the value of the Brazilian currency in turn making Brazilian exports more expensive in world markets in terms of US dollars.
As the inflow of this Chinese money affects the value of both currencies – when the value of the real reaches a 1:1 ratio against the US dollar - at that point the value of the real should lock in its value against a basket of currencies including the currencies that will make the new Asian currency (such as the euro) including the currencies of China, Japan, and South Korea.
And from then on the real (Brazilian currency) would fluctuate in global markets according to this new set up until the new Asian currency goes on line and Brazil adopts the new Asian currency right from the date when they launch the new Asian currency.
That strategy would also help prevent Brazil and China from incurring any currency loses regarding China’s long-term investment in Brazil.
Brazil and the new Asian Currency
When my last article was published on March 2, 2007 “ - “Here Is Why Brazil Should Adopt the New Asian Currency” – a number of people wrote directly to me and they also posted their comments on the web following the article. It became obvious to me that a number of people think that it is impossible for Brazil to adopt the new Asian currency. You can read the article at: http://www.brazzil.com/content/view/9821/80/#jc_allComments
One reader said: “But if you are talking about Brazil not having total power over its own currency, adopting a currency from elsewhere, that’s impossible.”
Regarding the euro
Many of these readers have that kind of reaction to my article, because of their nationalistic feelings, and also because they don’t understand the benefits of adopting such a strategy when a country becomes a full member of a new monetary system such as the European Monetary Union and they adopt a new currency such as the euro.
I would suggest that the readers who want to understand a little better why such leading countries as France and Germany decided to adopted the euro – they should read the book “The European Dream” by Jeremy Rifkin. He does a superb job of describing the journey that started in 1951, and all the steps that it took to bring the European Union and the European Monetary Union up to the advanced system that they have today.
In January of 1999 the euro was born, and out of the 15 countries that comprised the European Union (EU), 11 countries also belonged to the new European Monetary Union (EMU). The (EMU) country members adopted the new currency -- the euro, as of January 1, 1999. At that time the resulting euro market created an economy with more than US$ 6 trillion in gross domestic product (GDP).
The members of the Executive Board of the European Central Bank (ECB) are not there to represent their countries of origin. They are there to provide stability to the euro and they look at Euroland as a whole when making their policy. The euro is a monetary arrangement, and its monetary policy will be adopted independent of political control from its members.
This way of operating keeps the politicians out of the decision-making process and reduces the risk of them playing their political games with the country's monetary and currency systems.
Regarding the new Asian currency
I am a firm believer that if the economic policies adopted by the new Asian Monetary Authorities – a new Asian Central Bank (ACB) - are good enough for such a diversified group of countries such as China, Japan, and South Korea; then such policies also will be good for Brazil. The Brazilian economy will be better off in the long run under the new Asian currency system than under the fragile, weak, and old Brazilian currency system.
Abandoning a fragile and weak national currency such as the real in favor of a stronger international currency such as the new Asian currency would eliminate currency and maturity mismatches, because debts would be denominated in the same unit as a company's cash flow. It would also allow Brazil to take out long-term loans for all kinds of economic purposes.
The adoption of the new Asian currency by Brazil would bring about safety and stability for capital mobility. Long-term interest rates would decline and become less volatile -- as we have seen happening in Europe over the years, under the euro system where interest rates have gone down in Ireland, Italy, Portugal and Spain -- making it easier to cut budget deficits and promote growth.
In the last 20 years
The other major loss to Brazil is the human capital loss. There were a large number of well educated Brazilians who were moving out of Brazil in their search for a better future (according to “Veja” magazine article published on July 18, 2001, over 2 million Brazilians live outside Brazil). This outflow of human capital would have had a negative long-term impact on the future economy of the country, but today globalization has turned these people into assets for Brazil – Brazilian moving assets scattered around the world.
Plan for the China/Brazil investment process
The Brazilian and Chinese governments should sign a long-term agreement (35 to 50 years) regarding these long-term Chinese investments in Brazil including schedule of interest payments and so forth.
Brazil would create a new Brazilian government agency to be in charge and to be accountable for the flow of Chinese money of these various investments into Brazil. The new agency would operate with complete transparency to avoid scandals and misappropriations of funds, on both sides of the deal; on the Chinese and on the Brazilian side, related to all aspects of this new type of financing of very large projects.
The investments would be done taking into consideration both the Brazilian and Chinese long-term strategic needs, and here are the main areas for China to invest in Brazil. I would suggest that China invest at least $ 170 billion dollars in five major areas in Brazil plus another $ 30 billion dollars in a mutually beneficial space program as follows:
1) Nuclear power plants - $ 60 billion
2) Strategic infrastructure - $ 40 billion
3) High-speed broadband infrastructure - $ 20 billion
4) High-speed rail networks – Bullet Trains - $ 30 billion
5) Mortgage market - $ 20 billion
6) Space development and exploration - $ 30 billion
Major investment areas in Brazil regarding this plan
1) Nuclear power plants - $ 60 billion
I would suggest first, that Brazil borrow $ 60 billion dollars from China, and use the money to add at least 20 new 1,000-megawatt (MW) nuclear power plants over a 10-year period in strategic areas of Brazil (these nuclear reactors cost less than $ 2 billion dollars each), and also use part of the money to do some up-grading of its current uranium enrichment facilities. Today, Brazil has one plant, located at Resende, less than fifty miles from Rio de Janeiro, and this plant was designed to initially enrich only 60 percent of the material needed to supply their original two reactor plants. Ultimately, Brazil aims for complete nuclear energy self-sufficiency.
Brazil is home to the world’s sixth-largest uranium reserves, and developing its uranium enrichment facilities makes economic sense since the global nuclear power plant business is making a comeback in many countries, and it is growing with potentially large commercial global markets as more countries build new nuclear power plants.
Besides the 20 new nuclear power plants, Brazil should invest part of the money in a state-of-the-art nuclear waste reprocessing plant instead of having to find a place to store the spent nuclear fuel.
Used nuclear fuel (often called spent nuclear fuel) is nuclear fuel that has been irradiated in a nuclear reactor (usually at a nuclear power plant) to the point that it is no longer useful in sustaining a nuclear reaction. If not reprocessed to retrieve the remaining usable uranium and plutonium, it is a form of radioactive waste.
Nuclear reprocessing separates any usable elements (e.g., uranium and plutonium) from fission products and other materials in spent nuclear reactor fuels. Usually the goal is to recycle the reprocessed uranium. It is the process that partially closes the loop in the nuclear fuel cycle.
Use of breeder reactors combined with reprocessing could extend the usefulness of mined uranium by more than 60 times.
The technology for making reprocessed uranium fuel is well established, and there is no technical reason limiting its adoption. And nuclear reprocessing is a much better choice than the one the United States decided to adopt where used nuclear fuel is currently planned for disposal in deep geological formations, such as Yucca Mountain, where it has to be shielded and packaged to prevent its migration to mankind's immediate environment for thousands if not millions of years.
2) Strategic infrastructure - $ 40 billion
Developing the proper infrastructure is an important part of an economic development plan and serves as a foundation for any developing country to be able to achieve its goals regarding industrialization, urban development, and speeding up the movement of goods not only for the domestic market but also for international trade.
One advantage of being an emerging country is that you can benefit from leapfrogging in all areas of your economic development when you try to implement the best models that were available around the world at the time – you learn from other people’s successes and mistakes.
Today certain types of infrastructure development are a requirement for a country that is trying to achieve economic growth and also is trying to survive in a very competitive global economic environment.
There are various definitions of what constitutes infrastructure, but generally infrastructure refers to the large-scale public systems, services, and facilities of a country or region that are necessary for economic activity to become reality. The economic infrastructure includes such systems as the transportation networks with its highways, bridges, tunnels, airports, and ports, the water and sewerage facilities, the various types of energy distribution (electric and gas), and the various telecommunication networks distributed via cable or satellite.
These entire economic infrastructures play an important supporting role when a country is trying to secure its place in the global supply chain. It is important for the movement of goods inside the country – local goods or imported goods - as well as for the goods and commodities produced for distribution via international trade.
Let me give you just one example - today Brazil has 47 ports in the country – but the government needs to upgrade at least ten of them to international standards of technology and productivity – this modernization would be imperative to keep pace with Brazil’s export explosion in the coming decades. But the government probably will need to build a few more new ports in the future to accommodate the economic expansion that is under way and help to lower shipping costs for Brazilian exporters.
Construction costs for most of the infrastructure systems such as the energy, water and sewage, and transportation sectors is enormous and the construction period is also very long. Prediction of demand pattern and investment allocation, which are some of the key factors of infrastructure development planning, must be based on a long term economic development trend and land use planning, which also predict the country’s future demographics and possible economic structure.
3) High-speed broadband infrastructure - $ 20 billion
The federal government in Brazil, in partnership with state and local governments, needs to create and promote the universal availability of high-speed broadband infrastructure throughout the country, connecting the major communities in Brazil with the rest of the world. Today universal access to broadband is in the interest of the majority of the population in Brazil, and it is becoming almost a requirement for a country to be connected with a state-of-the-art high-speed broadband infrastructure to be competitive in the new global economy.
The investment in high-speed broadband infrastructure should be viewed in the same way governments view federal investments in basic infrastructures in a country, such as the highway system, water system, airport system, bridges and tunnels and so on…
Brazil should adopt the leading edge in technology available at the time of its investment regarding high-speed broadband infrastructure, and the government should keep in mind the infrastructure such as the systems in operation in South Korea, Japan and China.
An article published on the San Francisco Chronicle said: “If you live in South Korea, it is an everyday reality to have always-on super fast Internet -- broadband -- both in your cell phone and in your home.
South Korea is the most wired country on the planet. Some South Koreans can get up to 20 megabits of data per second -- breakneck speed by today's standards. Americans are lucky if they get 4 Mbps.
While South Korea leads in the rollout of broadband, the United States -- supposedly the world's technology leader -- comes in no better than No. 13, according to experts. About 76 percent of households have broadband in South Korea. The figure is 30 percent in the United States.
Broadband widens the digital data pipeline to allow complicated files, including pictures, graphics and video, to be downloaded at near-instant speed. Experts consider the development of broadband networks to be the single most important step for expanding digital technology and bringing cutting-edge computer applications directly into people's lives.
"There is no point in Korea where you can stand without receiving a signal," said Joy King, director of industry marketing at Hewlett-Packard. "In the U.S., we are still at the 'can-you-hear-me-now' level. When Europe and Asia are moving to multimedia text messaging, the U.S. has just started text messages. The U.S. is a Third World country in this aspect."
…Silicon Valley used to be hailed as the world's high-tech capital. Now many consider South Korea the king…. U.S. technology leaders are sounding the alarm that the nation is falling dangerously behind in broad areas of digital innovation, including broadband.
…In South Korea the government spent billions of dollars building a fiber grid, reaching schools and government buildings, and offered another billion in financial incentives to phone companies that strung broadband links to homes. Tough competition drove prices down, demand surged and the country was on a roll.
…HP's King cites several reasons for slow broadband development. "North America is lagging because first of all it didn't have one underlying standard," she said. "Secondly (it's lagging) because the government has not really invested directly in infrastructure. "
The US is a generation behind Japan and Korea in high-speed broadband, according to Technology Futures, Inc. While the U.S. languishes at 1 to 6MB/s, Japan and Korea are already rolling out next generation 20MB per second speeds.
On September 7, 2006 Questex Media published an article saying: “Some 62 million Americans are still using their telephone lines to dial into the Internet, according to recent figures from the Pew Internet and American Life Project. Other figures from research firms like Forrester show that only about 40% of Americans have high-speed connections at home, 30% rely on dial-up and 25% don’t have any Internet connections at all!
This at a time when China is poised to overtake the US to become the world’s largest broadband market. New figures from Ovum show China will have 79 million broadband subscribers by next year. And overall penetration is just above 3% in China, which means there’s plenty of room to grow. Ovum predicts 139 million subscribers by 2010, and a subscription growth rate of 75% annually.”
On June 26, 2007 DSL News published an article “US broadband speed lags behind” and the article said: “The availability of high-speed broadband in the US is significantly lower than in many other countries around the globe, according to a new report from Communications Workers of America (CWA).
According to the report, the median download speed in the US is 1.9 Mbps, compared to 61 Mbps in Japan and 45 Mbps in South Korea. France outstripped the US on broadband speeds as well, reporting an average 17 Mbps.
CWA President Larry Cohen said: "Speed defines what is possible on the internet. Speed determines whether we will have the 21st century networks and communications necessary to grow our economy and jobs."
Other nations around the world, especially "economic competitors", have concretely decided to stress high-speed networks and by delaying, America is doing no less than "[putting its] economic growth at risk".
The investment by the Brazilian government in a state-of-the-art high-speed broadband infrastructure around the country will play an important part in helping in the economic development of Brazil in the coming decades.
Private companies and local governments should connect to such infrastructure and supply services to the local populations, but competition between these service providers should help lower the cost of using the system to most customers as is the case in various countries where they have that type of set up.
That type of infrastructure set up is helping these countries not only to keep their high-speed broadband infrastructure at the leading edge of technological development, but at the same time they are able to provide all kinds of state-of-the-art services to customers at the lowest market price possible. Real competition at this level helps to lower the price to the end users.
4) High-speed rail networks – Bullet Trains - $ 30 billion
One of the major infrastructure projects that should be developed in Brazil as part of this Brazil/China partnership is the construction of a high-speed rail network in Brazil connecting vital areas of Brazil with a network of high-speed railway lines using the latest in technology regarding high speed bullet trains.
They can start with the construction of a 1,000-mile rail network system that should cost about $30 billion and connect an important area between Sao Paulo, Rio de Janeiro and immediate areas.
Brazil should build a high-speed railway system similar to the one that they have in Japan. The Shinkansen is a network of high-speed railway lines in Japan operated by Japan Railways. These trains can be up to sixteen cars long. With each car measuring 25 m (82 ft) in length, the longest trains are 400 m (1/4 mile) from front to back. Stations are similarly long to accommodate these trains.
Before 1964 conventional trains had to spend more than 6 hours traveling between Tokyo and Osaka (322 miles (515km)). With the introduction of Tokaido Shinkansen, the traveling time has been reduced to 3 hours and 10 minutes. Now the fastest Shinkansen connects Tokyo to Osaka in just 2 hours and 30 minutes.
Even though the fare is much cheaper for a highway bus between Tokyo and Osaka, few passengers choose it, due to more than 8 hours of travel.
Due to the High-speed railway system in Japan, the trains run speeds have been 443 km/h (275 mph) for conventional rail, and up to 580 km/h (360 mph) for maglev trainsets.
I am not suggesting that Brazil should develop a maglev train system, because of radiation concerns. I am suggesting the construction of the fastest conventional bullet train system available today.
This new bullet train system would help move not only the Brazilian people around, but also would play an important role as Brazil develops further its international tourism industry.
5) Mortgage market - $ 20 billion
The Federal Bank of Atlanta published a report in August 2006 - “A Revolution in Consumer Banking - Developments in consumer banking in Latin America” – and the report said:
“In Brazil, Mortgage lending took off in 2002 after 20 years of virtually no growth and despite high average interest rates. The boom was ignited by the central bank’s gradual reduction of deposit requirements in other sectors of the economy while pressuring banks to increase their participation in home financing. Accordingly, mortgage lending rose by 60 percent to $ 2.1 billion in 2005 supported by improved price and employment stability, and the establishment of a new mortgage guaranty. The government has earmarked approximately $ 1 billion from the 2006 budget to finance and guarantee housing loans for low-income families, with some of the funds coming from a worker’s severance pay fund called FAT. The government has also reduced taxes on building material to encourage the housing construction business.
Financial liberalization and stabilization of inflation and exchange rates have brought significant changes to the region’s housing finance systems. For example, mortgage denominated in indexed units linked to the general price index or workers’ salaries in Brazil have helped reduce the risk of default.”
On July 5, 2007 The New York Times published an article “Loan Changes in Brazil Motivate New Buyers and Home Building” and the article said: “Talk about an untapped market. Brazil’s newfound economic stability and changes in lending laws are for the first time making it possible for the country’s working poor to buy their own homes. And using money that has been pouring in from foreigners who sense a lucrative investment - $4.8 billion since September 2005 – the country’s construction and real estate companies are building as fast as they can.
…But since Luiz Inacio Lula da Silva became president in 2003, interest rates have tumbled to 12 percent from 25 percent and appear set to continue falling. Inflation was 3.1 percent last year and is well under control. And both the minimum wage and workers’ salaries are rising at rates exceeding the cost of living, according to government figures, meaning workers have more disposable income. Buying a small home is finally a real possibility for many Brazilians.
…The country’s biggest mortgage financier, the government-run Caixa Economica Federal, estimates that Brazil needs 7.9 million new homes.
…Now, though, banks and other lenders are loaning up to 80 percent of the property’s value, allowing borrowers up to 30 years to pay them back and offering fixed interest rates for the first time.
…Banks are lending more thanks in large part to a 2004 law that makes it easier for them to seize property from borrowers who fail to repay their loans. Previously, repossessing homes took banks six to eight years. Now it can take less than a year.…That law means Brazil now has one of the most modern mortgage systems in the world…”
The Chinese government can take advantage of this real estate boom that is under way in Brazil, and they can invest at least US$ 20 billion dollars in this unique long-term opportunity. By getting in early on the real estate boom in Brazil they can tap the borrowers who are the lowest risk.
The major real estate companies in Brazil are all getting prepared to build millions of new homes to meet this new demand.
Global freshwater supply
Here is the number one reason why China should invest in Brazil for the long-term. These investments should be viewed from China’s perspective not just as another investment to maximize its returns on invested amounts. It should be viewed by China as a matter of national security and long-term survival for its people. It should be viewed as a complement to China’s own economic development considering the importance of securing a food supply for its very large and growing population.
A few years ago, I remember reading an article in “The Economist” magazine about global freshwater resources, and the article said that the number one reason for conflict and wars between countries in the 21st century was not going to be politics, ideology, and religion – it will be disputes regarding a very scarce and precious resource – freshwater.
Freshwater is very important because it is needed for life to exist. Human beings have many uses for freshwater including in agriculture, in industrial production, in all kinds of households uses, and as part of its environment such as rivers, and lakes.
Our planet’s water resources are made up of two types of water: 1) salt water/ocean water which represents 97 percent of total water resources and, 2) freshwater with only 3 percent of the water resources available to us. (And over two thirds or 2 percent of the freshwater is frozen in glaciers and polar ice caps, leaving only 1 percent available for human use in “surface” and in “groundwater” water).
It is estimated that the volume of global freshwater is made up of three types of freshwater:
1) The icecaps and glaciers are the largest sources of fresh water on earth at 68.7%.
2) Groundwater comprises 30.1% of all freshwater resources on earth.
3) Surface freshwater comprises 0.3% of all freshwater resources.
4) Other freshwater comprises 0.9% of all freshwater resources.
Surface freshwater is water in rivers, lakes, reservoirs, and wetlands. Surface water is naturally replenished by precipitation – rain or snow – and naturally lost through discharge to the oceans, evaporation, and sub-surface seepage. Surface freshwater is affected also by man-made pollution, and global warming.
The sources of the surface water are estimated to be: lakes (87%), swamps (11%), and rivers (2%).
Other freshwater sources also include desalination. Desalination is an artificial process by which ocean water is converted into freshwater. Desalination is currently very expensive compared to most alternative sources of water, and only a very small fraction of total human use is satisfied by desalination.
Of all the freshwater on Earth, only about 0.3 percent is surface freshwater contained in rivers and lakes - yet rivers and lakes are not only the water that most people are familiar with, but are also the source where most people get the water needed for their everyday lives.
Freshwater usage
The main uses for freshwater are: it is estimated that 70 percent of worldwide use is for agriculture/irrigation. About 15 percent is for industrial uses such as in power plants, oil refineries, chemical plants, mining operations, and all kinds of manufacturing plants. And another 15 percent is used for household purposes such as cooking, drinking, bathing, sanitation and so on…
The supply of freshwater is not equally available around the world, and the supply that is available can be affected by many factors including the weather changes and overpopulation. For example, we see on the news on a regular basis major droughts in parts of Africa that result in famine to large parts of the population of various countries.
In the coming years China will have a major strategic problem to solve regarding freshwater rights – as they build new cities to accommodate the hundreds of millions of people who will migrate from rural areas to the big cities - they will have to decide how to allocate their scarce freshwater supply – this suggests that they will have a growing conflict between agricultural water users, who currently consume the majority of the water, and its new demand required for use in the big Chinese cities.
We also have to keep in mind that China will face a severe freshwater shortage in the coming years due to physical scarcity, and a condition of overpopulation relative to their carrying capacity with respect to their freshwater supply.
In an article published in “Foreign Policy” (2001) issue 126 on pages 60-67 - “Dehydrating Conflict” the author said: “Water stress can also exacerbate conflicts and political tensions that are not directly caused by water. Gradual reductions over time in the quality and/or quantity of fresh water can add to the instability of a region by depleting the health of a population, obstructing economic development, and exacerbating larger conflicts.
Conflicts and tensions over water are most likely to arise within national borders, in the downstream areas of distressed river basins. Areas such as the lower regions of China's Yellow River or the Chao Phraya River in Thailand, for example, have already been experiencing water stress for several years. As well, countries that rely heavily on water for agricultural use, such as China, India, Iran, and Pakistan, are particularly at risk of water-related conflicts.”
Here is where the connection between China and Brazil becomes so important in the coming decades, mainly from the Chinese perspective. The study published by the Pacific Institute regarding the global freshwater supply by country in 2006 - shows that Brazil is the richest country in the world regarding its total supply of freshwater.
Brazil has almost twice the amount of available freshwater as Russia, the country ranked second in the list of global freshwater supply. And Brazil also has almost 3 times more freshwater than the countries ranked 3rd (Canada), and 4th (United States of America) in that list.
Total renewable Freshwater Supply by Country (updated in 2006)
Annual Renewable Water Resources (km3/yr)
1) Brazil - 8,233.0
2) Russia - 4,498.0
3) Canada - 3,300.0
4) United States of America - 3,069.0
5) Indonesia - 2,838.0
6) China - 2,829.6
7) Colombia – 2,132.0
8) Peru – 1,913.0
9) India - 1,907.8
10) Venezuela – 1,233.2
All quantities are in cubic kilometers per year (km3/yr)
Source: Worldwater Org – Pacific Institute for Studies in Development, Environment, and Security. These data are typically comprised of both renewable surface water and groundwater supplies.
The Guarani Aquifer
Located mainly in Brazil, the Guarani Aquifer covers about 1.2 million square kilometers (463,323 square miles) – it is the largest single body of groundwater in the world, and the aquifer's water is considered of excellent quality.
The Guaraní Aquifer, located beneath the surface of the original four Mercosur countries (Argentina, Brazil, Paraguay and Uruguay), is one of the world's largest aquifer systems and an important source of freshwater for its people. Named after the Guarani tribe, it covers 1,200,000 km², with a volume of about 40,000 km³, a thickness of between 50 m and 800 m and a maximum depth of about 1,800 m.
It is estimated to contain about 37,000 km³ of water and the largest single body of groundwater in the world, with a total recharge rate of about 166 km³/year from precipitation. It is said that that this vast underground reservoir could supply fresh drinking water to the world for 200 years. Due to an expected shortage of freshwater on a global scale, which environmentalists suggest will become critical in under 20 years, this important natural resource is rapidly becoming politicized, and the control of the resource becomes ever more controversial.
The area of the Guarani, in Argentina, is of 225,500 km²; in Paraguay is of 71,700 km²; in Uruguay is of 58,500 km², and in Brazil is of 840,000 km², spreading itself under the subsoil of eight states (Mato Grosso, Mato Grosso do Sul, Goiás, Minas Gerais, São Paulo, Paraná, Santa Catarina and Rio Grande do Sul), and 70.2% of the total area of the aquifer is located in Brazil.
The area where the Guarani is located is characterized by concentrating in the most important zone agropecuarias of each country. Besides, the entire region is characterized by fertile lands and soil with high indices of productivity where farming of soy, maize, wheat, barley, sucro-alcooleira, etc., are well developed, and with excellent potential for further development of the cattle business with its great diversity of breeds, beyond an industry already well diversified.
It is calculated that the annual extraction of the water from aquifers from around the world is of 160 billion cubical meters or 160 trillions of liters with some countries showing extreme usage such is the case in China, India, Saudi Arabia, Africa of the North and in the United States. On the other hand, Brazil is in great shape when compared with these countries regarding its freshwater supply.
Privatization - the wrong strategy for Brazil regarding freshwater resources
Freshwater net published an article on its website saying: “Global consumption of water is doubling every 20 years, more than twice the rate of human population growth.
… Multinational corporations recognize these trends and are trying to monopolize water supplies around the world. Monsanto, Bechtel, and other global multinationals are seeking control of world water systems and supplies.
The World Bank recently adopted a policy of water privatization and full-cost water pricing. This policy is causing great distress in many Third World countries, which fear that their citizens will not be able to afford for-profit water.
… "Governments around the world must act now to declare water a fundamental human right and prevent efforts to privatize, export, and sell for profit a substance essential to all life." Research has shown that selling water on the open market only delivers it to wealthy cities and individuals.
Governments are signing away their control over domestic water supplies by participating in trade treaties such as the North American Free Trade Agreement (NAFTA) and in institutions such as the World Trade Organization (WTO). These agreements give transnational corporations the unprecedented right to the water of signatory companies.
… Water-related conflicts are springing up around the globe. Malaysia, for example, owns half of Singapore’s water and, in 1997, threatened to cut off its water supply after Singapore criticized Malaysia’s government policies.
Monsanto plans to earn revenues of $ 420 million and a net income of $ 63 million by 2008 from its water business in India and Mexico. Monsanto estimates that water will become a multibillion-dollar market in the coming decades.
Yet governments are handing responsibility of this precious resource over to giant transnational corporations which, in collusion with the World Bank and the World Trade Organization, seek to commodify and privatize the world's water and put it on the open market for sale to the highest bidder. Millions of the world's citizens are being deprived of this fundamental human right, and vast ecological damage is being wrought as massive industry claims water once used to sustain communities and replenish nature.”
Freshwater policy in Brazil
Freshwater policy in Brazil should protect the entire freshwater system in Brazil including groundwater, and should keep it as a community service, and access to freshwater should be considered as a fundamental right of every person living in Brazil.
The water companies in Brazil should be developed with help from the federal government and they should operate such as mutual insurance companies in the United States – they should operate as non-profit organizations and the owners of these water companies should be the communities being served by the water company system.
The cost of water in Brazil should be priced according to the usage of the customers of the water companies, but a reasonable amount of freshwater should also be supplied to the poorest members of society who can’t afford the cost of these services without the help from the federal government.
The water distribution system of any area in Brazil shouldn’t be allowed to be privatized under any circumstance not only today, but also in the future.
Brazil should add on its constitution an amendment forbidding the privatization of any water company in Brazil, and if there is any private water company today they should deprivatize and turn it into a non-profit mutual company.
The same rules should also apply to the entire sewage system in Brazil.
If the Brazilian government does not act very strongly in this direction, then a very few major players (corporations) will try to control the freshwater system in Brazil. Remember, these corporations would make a major monetary killing for themselves at the expense of the entire population, and they would also interfere with the development of the Brazilian economy.
In the coming decades freshwater rights will become a major issue and a battlefield between the have and have-nots in country after country around the world. Today it is time to spell out in black and white all the government regulations which will affect that area of infrastructure development and create the guidelines which would help preserve the Brazilian freshwater reserves that are available today. Being proactive today in that regard would also give all the necessary protection to a system and a national asset that will play a fundamental role in the future development of the Brazilian economy.
Brazil also should make an agreement with the other Mercosur countries including Argentina, Paraguay, and Uruguay regarding the freshwater usage from the Guarani Aquifer. And this agreement should be in line with the government regulations regarding freshwater and sewage that would be in force in Brazil; including the regulation forbidding privatization of freshwater distribution systems.
A new global trend
The Financial Times (UK) published an article on May 24, 2007 – “Thirsty work” – Australia’s drought puts export farming on trial. That particular article gives us in a nutshell what is happening today in many countries around the world. This problem is happening not only in Australia; it is a major issue that will be discussed in the near future by many countries around the world exporting agricultural products.
Now quoting from that article: “Spot the odd one out. Asia has billions of cheap workers, so exports manufactures. Europe has millions of graduates, so exports banking. Africa has steamy tropical regions, so exports fruit. America has Hollywood, so exports movies. And Australia is the second-driest continent on earth after Antarctica, so it exports water.
… In the wake of the worst drought in living memory in Australia, a battle over the use of water is raging between farmers, urban consumers and environmentalists. Australia in effect sends abroad billions of cubic metres of water a year by using it to grow a $ 25 billion dollars worth of exported farm goods, both "dryland" (rain-fed) produce such as wheat, beef, wool and dairy, and irrigated crops such as rice and fruit.
If farmers can no longer export on that scale, the worldwide implications will be serious.
… Like many Australian farming communities, it is a place built to feed far-off consumers. Farm products, which suck up 65 - 70 per cent of the country's water, make up nearly a quarter of all exports.
… But despite a historical Australian reverence for farming and rural life, the use of water in agriculture has now come under intense scrutiny. Trade should enable dry countries to import water by buying water-intensive food and fibre. Egypt, for example, now imports half its wheat, the traditional staple food. Parched Australia, however, is the world's largest net exporter of the "virtual water" embedded in farm produce.
Critics charge this means the country is in effect sucking itself dry to subsidise foreign consumers, and that it should expand other exports instead. Environmentalists say both irrigation and dryland farming deplete water stocks and cause rivers and the country's already naturally salty earth to become dangerously saline.
… Irrigated farming is under particular scrutiny. Just 0.5 per cent of Australian farmland is artificially watered, but it produces 23 per cent of agricultural output. So much is financially and psychologically invested in irrigation in towns such as Griffith that to end it will be an enormous upheaval.
… Yet for many Australians the question is whether agriculture is a good use of water within Australia, not whether its farmers are more efficient than their counterparts in wetter countries. Many cities are suffering severe limits on water use.
… As most scientists believe, global warming means south-eastern Australia's climate is on a drying trend. Another few dry years and no amount of pleading is likely to save the irrigators. It is not a pleasant prospect in Griffith, still arguing that what it does benefits Australia and the world beyond.”
The growing scarcity and competition for water resources are becoming a major threat to important breadbaskets areas in India and also in China. An increasing number of the rural poor on these countries are coming to see entitlement and access to water for food production and for domestic purposes as a more critical problem than access to health care and education.
World Resources Institute (WRI) has estimated that 41 percent of the world's population, or 2.3 billion people, live in river basins under 'water stress,' meaning that per capita water supply is less than 1,700 m³/year. Water scarcity is partly due to the uneven geographic distribution of water, as determined by the Earth's climate system. It is also a result of regional variations in population size such as in China and India.
Lester R. Brown from the Earth Policy Institute wrote: “Water scarcity may be the most underestimated resource issue facing the world today. As world water demand has more than tripled over the last half-century, signs of water scarcity have become commonplace. Some of the more widespread indicators are rivers running dry, wells going dry, and lakes disappearing.
… This reported 1 percent growth would be reassuring, but it appears to be overstated since governments are much better at gathering data on new irrigation projects than on irrigation reductions as water is diverted to cities or aquifers are depleted. It is quite possible that the historical growth in world irrigated area has come to a halt, and the area could even be declining.”
Five years ago World Water Org. published a book “The World's Water” and the book was an effort to explore, understand, and solve a variety of critical water issues that include the global water crisis, global warming and water, privatization and globalization of water, and water-related conflicts. They also said: “The central thrust of The World's Water 2002-2003 is that we must rethink the way we capture, distribute, and use water if we are to meet the challenges of increasing scarcity and growing populations.
Water is one of our most critical resources issues that we will have to deal with in the coming years, and there is the complex connection between water and food production which is being made even more complex because we still don’t fully understand the consequences and the impact of climate change and global warming on the entire food production system of our planet.
Global consumption of water is doubling every 20 years, more than twice the rate of human population growth. According to the United Nations, more than one billion people already lack access to fresh drinking water. If current trends persist, by 2025 the demand for fresh water is expected to rise by 56 percent more than the amount of water that is currently available.
It’s not oil, or ethanol - it is its vast supply of freshwater. Brazil will be in a unique position in decades to come and it should use this strategic advantage to connect with a partner such as China that can help Brazil regarding its goal of achieving economic development, growth, and prosperity.
Brazil’s valuable resource (freshwater) will become even more valuable in the coming years as more and more countries are forced to reevaluate their national policies regarding their freshwater resources and that will affect the price and availability of agricultural products around the world.
Based on the mutual economic development and strategic self-interest of both countries it makes a lot of sense for China and Brazil to go forward and turn into reality the economic plan that I proposed in this article.
It will be imperative that China finds a reliable source of food supply outside China to complement its internal food production for them to be able to feed the Chinese population in future years. And if you look around the world it is obvious that China does not have too many options available to them. It will be a smart move for China to secure as soon as possible this food supply from Brazil to feed the Chinese population in the coming decades. The time for China to act is now, and not when there is a crisis and a shortage in the food supply chain around the world.
A new Paradigm for direct investment
As I mentioned before, Brazil should create a Brazilian government agency to handle this project in partnership with the Chinese Sovereign Wealth Fund that would supply the money to be invested in Brazil.
The agreement between both countries would include a process of transparency and accountability regarding the entire plan. And every 3 years the people from both countries who were responsible for these projects would make a complete review of the projects and would fine-tune each individual project at that time according to the latest needs. The projects can’t be placed in a straight jacket; they must be designed with room for future adjustments to be made regarding changes in technology, and demand requirements for each individual project.
Many people would say this set up is no good - it is central planning – let the free marketplace and Wall Street decide where this money should be invested. My response to these people is: the free market and Wall Street do not have such a good track record as you think when we look closely. If you don’t know what I am talking about I will refresh your memory for you.
Basically, you don’t have to look further than the savings and loans crisis of the 1980’s that cost over $ 200 billion in taxpayer money to clean that mess. Then we had Enron, WorldCom, Adelphia Communications, Global Crossing, Citybank, Tyco, mutual fund industry scandal, the hedge fund industry scandal, Halliburton scandal and so on….
Another example: for years, an overvalued financial market built on misleading and false information sent highly misleading signals to investors who eventually lost trillions of valuable national savings, which were misallocated to unneeded and wasteful investments; as a result investors lost over US$ 2 trillion in the telecommunications industry and over US$ 1 trillion in the dot.com fiasco.
I know that greed is getting completely out of control in the United States; just look at the latest subprime scandal and the mess that these guys created not only in the United States but also in the major financial markets around the world.
On the other hand
On the other hand, I can give two major examples to support my case for direct government investment from China to Brazil.
First regarding China
China is doing a superb job in creating new infrastructure and super cities around China to accommodate the country’s rapid urbanization resulting in many new cities in China that one has never heard of that have populations of 6, 7 or 8 million people. The Chinese can also help Brazil with the knowledge that they have been acquiring regarding their experience in economic development that has been happening in China on such an extraordinary scale.
Second regarding Brazil
Regarding the development of Brazil’s ethanol industry over the last 30 years, Brazil did not fix its energy problem based on free market solutions. If Brazil were waiting for the free market to fix its dependence on imported oil, then Brazil still would be a slave to that market today in the same manner as the United States.
Who had the foresight to fix that problem in Brazil?
The generals did it in the mid 1970’s when we had that major global oil crisis. Brazil had a dictatorship at that time and the generals decided that Brazil was going to fix that problem and they put in place all the rules, regulations and incentives necessary to develop ethanol production on a large scale in Brazil.
Brazil was able to develop an ethanol industry based on sugar cane, and its vast distribution system network, because of Brazilian government planning followed by the actual implementation of such plan.
The US is supposed to be a free market economy – but is the free market smart?
I don’t think so – and you don’t have to look any further than the ethanol production in the United States – from corn. Besides, the free market usually is good for short-term solutions and not so good for achieving long-term goals.
There are many reasons why it is hard to replicate in most countries the very successful Brazilian ethanol production and distribution system – first, you need all the elements necessary to create such a system including the right climate, type of soil, the availability of freshwater, and so on… – second, it requires a dictatorship type of government, as Brazil had for many years, for a central government to be able to formulate the energy policies, develop a plan, and follow up with its implementation all the way to a successful completion.
Without the dictatorship in Brazil, and the generals imposing the rules to develop such an energy solution for the country, today Brazil would be in the same energy mess that the United States is going through – the US is highly dependent on foreign sources of oil. (The US depends on imported oil from the most unstable areas of the world including the Middle East, Nigeria, Venezuela, and so on…)
It is hard for government intervention to work in most cases. For example: In Brazil the generals designed the right policies with the right incentives to transform the energy market in Brazil. It took 30 years for them to refine the system and get to the point that they are today – it took a lot of hard work to develop the state-of-the-art system that Brazil has and other countries around the world want to copy.
Brazil got lucky and it was able to place the right policies to develop an effective energy system network based on ethanol made of sugar cane. The United States had the chance to develop a similar energy solution, but the US free market system chose the wrong path instead – they decided to develop ethanol from corn.
Here is an actual example of the free market making the wrong choice – one country makes the right decision under government planning and implementation, and the other country makes the wrong choice under a free market system.
The American system is in shambles and it does not have a prayer to get any better because of the way the free market works – the oil companies don’t want to give up their monopoly position and they will try to undermine the competition in every way possible.
Americans could have corrected the direction of their ethanol industry development a long time ago, because the American scientists have been aware and have been following all the ethanol developments in Brazil. But the US free market system kept the US ethanol industry going in the wrong direction. Anyway, US ethanol production is made from corn – and Americans have not seen as yet the full impact of that mistake on their food prices.
Besides, ethanol made of sugar cane has a major advantage over ethanol made of corn.
Why did the US make such a mistake to start with and still continues today making that mistake even bigger? Because the US government did not adjust its government subsidy programs accordingly to adjust for this new use of corn – the original US government subsidies that were on the books were geared for food production, and not for this new use of corn to produce ethanol to fuel our cars.
It is also obvious that because the Brazilian economy is energy self-sufficient it places Brazil in a very special category of countries that are immune to a possible blockade of the Strait of Hormuz to prevent oil from being shipped from the Middle East to the rest of the world.
Conclusion
The readers might have one question left on their minds regarding the economic development plan that I described in this article. The Chinese can supply the money for all this economic development in Brazil, and the entire plan can be followed to its successful completion, and so on…
But the Chinese would have a major question regarding how Brazil will be able to deliver year after year, on a consistent basis, and be a reliable source of food supply to China.
Brazil would guarantee that part of the bargain through its taxation system by giving special tax incentives to farmers who sell their foodstuff to China.
The same type of investment agreement also can be reached with the oil producing countries of the Middle East such as Saudi Arabia, Bahrain, Kuwait, United Arab Emirates, and Qatar.
After the agreements are in place, from then on Brazil would give preference to sell its foodstuff production, first to these countries including China, and the oil producing countries of the Middle East.
I am also mentioning the oil producing countries of the Middle East because on June 13, 2007 I spent the entire day attending a seminar in New York regarding economic development in Saudi Arabia, and I learned the following:
The Saudis are estimating on the conservative side that oil prices will have a floor price in the coming years of around US$ 50.00 per barrel, and they expect that Saudi Arabia will have a cash flow generated by the oil revenue that will exceed $ 13 trillion dollars for the period 2007 to 2030.
And they are also estimating that the cash flow to be generated by the oil revenues for the combined Gulf States to exceed $ 24 trillion dollars for the same time period. In other words, with that kind of cash flow there will be a lot of business opportunities in that area of the world year after year.
These estimates were made when the price of oil was around US$ 65 per barrel, but on September 20, 2007 oil prices reached US$ 84 per barrel. Another important point to keep in mind is the value of the declining US dollar in world markets in response to the US government actions related to the latest financial crisis that at the same time it goes against the responsibility that the US government has in protecting the intrinsic value of the US dollar. Today the US dollar was trading around US$ 1.42 to euro 1.00 but in the near future the US dollar should continue its declining trend.
By the way, the population of the oil producing countries of the Middle East is very small, and should not interfere with Brazil’s goal of helping to feed year after year the Chinese population under the above plan.
There are risks for both countries when we establish such powerful long-term connections and economic ties between Brazil and China, but I am sure that the mutual benefits will outweigh, in the long run, the negatives of such a plan.
People who will criticize the enclosed plan will say that this plan is not fair to the other countries around the world because Brazil would give preference to these countries regarding Brazil’s foodstuff supply available to the export market. I remind these critics what Charles de Gaulle once said: “countries have no friends only interests.”
China should go ahead and make these investments in Brazil without taking in consideration the ups and downs in global financial markets. A final reminder and something to keep in mind when evaluating the merits of this plan:
In November 2003 an article by James Kynge published by The Financial Times “China encourages mass urban migration” said: “China is to encourage the migration of between 300m to 500m people from rural areas to towns and cities by 2020, a transformation that Beijing hopes will help drive growth but which will also fundamentally alter the economy and society of the world's most populous nation.
The biggest potential migration in human history is now part of China's master plan. Wang Mengkui, head of the cabinet's think-tank, told the Financial Times that the country's urban population would rise to around 800m by 2020, up from an official 502m at the end of last year.
Fast Company magazine, March 2007 issue, published an article by global trends consultant and futurist Andrew Zolli. He said in his article: “China is planning to build 20 new major cities each year for the next 14 years, and the ones it already has are growing by 13 million to 15 million people annually. Up to 300 million farmers will move from the countryside in just the next 20 years."
The policy-makers in China must be aware that the country's rapid urbanization will affect its ability regarding local food production, since, when a country embarks on such a huge urban and economic development, there are also other costs when a new highway and road system, bridges, new manufacturing centers, shopping malls, condos, and so on are being built. Many times they are being built where before there were farms that supported the internal food production system of that country. When you replace productive lands with roads, and with all kinds of concrete structures, in the process you are also reducing even further your future food production capabilities.
Food production is a very important issue and a matter of national security regarding the long-term survival of its people – hungry people can create chaos and even revolution – and China and the rest of the world knows what happened in China during the great famine not long ago. The impact of such a disaster would be even more devastating to China today because of the internet and a world driven by 24/7 news coverage.
The final conclusion is: It’s imperative that China move forward in an aggressive fashion and implement with Brazil the plan described in this article. And China should look at it as a matter of national security and future survival.
For a long time I have been hearing the pundits say that an economic rising tide would lift all ships. These Chinese investments in Brazil would help lift all ships in Brazil, in turn creating further demand in Brazil for Chinese goods as well – it’s a win, win plan for Brazil and also for China.
Ricardo C. Amaral is a writer and economist. He can be reached at
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