Interview: Jim O’Neill
After creating the BRIC concept In 2001 – the acronym that associates Brazil, Russia, India and China, developing countries with distinctive cultural, political and geographical traits but also presenting accelerated degrees of economic growth — economist Jim O’Neill was elevated to the condition of “oracle” on the future of the global economy. By coining the term that would be adopted by everybody as being synonymous with developing nations presenting low investment risks, tagging them as being fundamental for the world economy, he had a major impact on the international financial establishment.
Anybody who enters the headquarters of the Goldman Sachs Asset Management investment bank in London will get the impression that he or she has somehow arrived at many different places at precisely the same time. Simultaneously, here one breathes the fluctuations of the world’s various stock exchanges: the atmosphere of Tokyo, Shanghai, Hong Kong, Frankfurt, São Paulo and New York. It is from here, in the heart of the London financial center, where O’Neill, who is chairman of the bank that is specialized in financial planning and investment strategies for high income individuals and companies, customarily issues his opinions about the global economy — always focused on the four countries that have since become renowned worldwide.
An invitation to a traditional late afternoon English tea was the starting point for an animated conversation with O’Neill, a native of Manchester who is crazy about soccer and fanatical about the most popular team in his home city (Manchester United, present in innumerable photos on display in the economist’s office). Relaxed and at ease, he spoke with Petrobras Magazine about his new wagers on the global economy, the prospects for Brazil and the energy market, without forgetting to comment on his sports passions.
After the creation of the term “BRIC,” in 2001 you and your team identified another 11 countries with good potential for economic growth, called the “Next Eleven.” This time, your bet was centered on four of these 11 countries: Mexico, Indonesia, South Korea and Turkey. Why have these countries been able to pull away from the rest of the pack?
Jim O'Neill: I identified these four countries, alongside the BRICs, as copies that were economically strong enough not to be considered “emerging.” Today, I prefer to call them “growing markets.” Many similarities link the eight nations: large populations, a considerable level of development, economic success and seriousness regarding business dealings, which makes them good safe havens for investors in search of liquidity. These are the characteristics that distinguish them from the other emerging countries. For example, on an individual basis all of them represent at least 1% of the world GDP. Let’s look at the example of South Korea, which has one of the highest levels of education and use of technology. It is almost an insult to consider it an emerging country. Nevertheless, all of these nations still need to convince investors to no longer treat them as such.
In the last decade, besides coining the term BRIC, you also predicted the decline of the dollar against the euro and other important international currencies. Previously, during the 1990s, you anticipated the appreciation of the yen on the international markets. After getting it right so many times, what are your next wagers regarding the world economy?
Jim O'Neill: My bet continues to be on the BRICs and, mainly, their consumers. If there will be one big story of the next decade, it will be about the consumption of these nations. What is certain is that we no longer live in a world influenced by American consumers. Recently, I heard a story that confirms this: the Louis Vuitton store in Paris slapped on a purchase limit because of the heavy presence of Chinese tourists. Stores on Madison Avenue, in London, are seeking employees who speak Portuguese fluently to attend to Brazilian visitors. A few weeks ago I was in South Beach in Miami (USA), and I was amazed to see so many Brazilian there. I only heard Portuguese around me… Therefore, this proves that we are entering a new phase
In your opinion, what will be Brazil’s role in the global economy in the upcoming years?
Jim O'Neill: With regard to Brazil, I believe that we are in an interesting year. During its first decade as a BRIC, Brazil underwent difficulties during the first five years and emerged just fine, and now is doing very well economically speaking. As an investor, I believe that one must observe and wait. The explanation is simple: President Luis Inácio Lula da Silva, who in my opinion was probably the main political leader of the G-20 over the past decade, has just left government. And substituting him is not an easy task. The mission is as hard as substituting Alex Ferguson as the coach of Manchester United (laughter). However, Brazil is a fantastic country, blessed with a good climate and a number of sources of renewable energy. Previously, one bet on Australia as the country of the future; however, Brazil has all the conditions needed for growth and to become an even stronger power.
In this regard, what are the main challenges for the new president, Dilma Rousseff?
Jim O'Neill: Her biggest challenge, apparently, is the simplest: to maintain the success that has been attained over the past few years. Brazil became a new country in the past decade, particularly regarding the task of maintaining inflation at a stable level. I was once in São Paulo to participate in a conference together with economist Paulo Lamy and he told me that the inflation projected for that year would be the same as when he was a young man. This is incredible! One must remember that the current good moment came about in part because of the administration of (former Brazilian president) Fernando Henrique Cardoso and my good friend Armínio Fraga (director of the Central Bank during the administration of Henrique), but the results were actually transformed into reality doing the government of Lula. Therefore, Dilma’s major challenge is to guarantee that this continues, because Brazil has a terrible economic history. Another point that should be noted is foreign exchange. I have friends in Rio de Janeiro and São Paulo who visit me in London and find the cost of living here very low. No other citizen in the world would share this opinion. The Brazilian real is very strong and this causes problems for Brazilian industry, and could yet weaken the power of the Central Bank. Nevertheless, control of inflation is vital.
How could the recent discoveries of major oil reserves on the Brazilian coast influence the Brazilian economy?
Jim O'Neill: Sincerely, I don’t know. At first glance, it seems exciting. But Brazil must be very careful. Will the discoveries leverage the country? Perhaps yes, perhaps not. If we look back 100 years, the majority of the successful world economies were not tied to commodities. One of the things that I closely follow is the performance of Petrobras. It so happens that the company is very important (for the economy of Brazil). Speaking in generic terms, I believe that the Brazilian government seems to be quite wise to help Petrobras with its investments, because in this very complex world the purely private companies will not invest capital at the level that Petrobras is investing. Therefore, this seems to me to be an intelligent move.
And can these discoveries increase the importance of Brazil in the global economy?
Jim O'Neill: They already have. Petrobras recently issued shares and investors from around the world wanted a piece of the company. If I’m not mistaken, it was the largest issue ever conducted in the world (a record amount of R$ 120 billion was obtained). Therefore, the discoveries already have, in a certain manner, changed the position of Brazil with regard to global investors and also the role of Brazil in the world energy industry.
What’s your evaluation of how the crisis in the Middle East could it affect the energy industry in the short, medium and long terms?
Jim O'Neill: (laughter) I’ve been in the market for 30 years and I’ve learned some of my predictions do not come true. At the same time, I have a Ph.D in oil. But I have concluded that making predictions about the price of a barrel of oil is close to insanity. Today, what really influences the price of oil on the international markets is the Chinese economy, and not what happens in the Middle East. At this moment, many analysts are writing about this subject with a great degree of confidence. But I believe there is a great possibility that they are all wrong. In theory, however, because of the stability of Brazilian policies, the scenario is promising — mainly in the short and medium term. A recent article in the Financial Times written by a former executive of British Petroleum (BP) discusses the topic, arguing that there are many reserves in politically unstable regions, which favors Brazil. Over the long term, everything depends upon Petrobras’ success. Furthermore, the situation can change in the Middle East. I’m quite anxious to see what is going to happen in Egypt (after an ebullient political process that culminated with the fall of Hosni Mubarak in February after 30 years in power, the Egyptian army reported it will hold parliamentary elections in September). In the past, I never thought that the Middle East and North Africa would be good economic bets. However, if we analyze the fact that the region has a population of 400 million people, the double of Brazil, there is major unexploited potential, with chances of seeing a new BRIC.
Do you believe that the increasing pressure on the part of society for a more sustainable energy model could lead to major changes in the energy industry, especially regarding safety issues?
Jim O'Neill: The case of BP in the Gulf of Mexico and all of the repercussions that were caused are good examples. There are other locations where the environmental risks for exploration are quite substantial. That is where another big challenge for the industry lurks. Therefore, I believe that the private companies are not the ideal organizations to resolve the world energy problem. I say this because exploitation of new reserves does not only involve great human risk, but also environmental risks. Shouldn’t these companies take on this responsibility? Once again, I think this represents a good opportunity for Petrobras.
Regarding energy matrixes, in what direction do you think the industry is going?
Jim O'Neill: Let’s look again at the five-year economic plan that has been prepared by China. Prime Minister Wen Jiabao announced a target for 7% less growth this year and the reason for this involved both energy and environmental issues. I visit China frequently and I have seen the transformation of the cities, which continue to be polluted, even outside of the large metropolitan areas. I can see that the Chinese are concerned. The five-year plan also shows great interest in alternative energy sources. I believe that the wind, solar and obviously biofuel markets have major potential for growth during the decade. And Brazil also could be a beneficiary of this.
In your opinion, among these energy sources which has the best potential?
Jim O'Neill: I’m not a specialist in this matter, but I believe that all have good potential. Despite a negative history, nuclear energy could be adjusted for some countries. Hydroelectric power, as we see in Brazil, also. I believe the solar power matrix is also a good bet. China, for example, is investing heavily in this sector, building large solar projects near Mongolia, as well as in the neighboring country itself. It is clear that today these energy sources are not cheap. However, the tendency is for constant innovation that will change this situation.
Let’s change the topic a bit and speak about sports. London’s will hold the Olympic Games in 2012. What do you expect of this event? What is the legacy that the Olympics will leave in the city?
Jim O'Neill: in the first place, I expect some and good weather, because London is known for its bad climate (laughter). To be honest, I believe that competitions such as the Olympics and the World Cups should be held in the emerging countries and those that are growing. Maybe I’m going to get into big trouble saying this, but the legacy of the Olympics in a city such as London is small. In truth, I really don’t think we need an event like this, although in the area where most of the competition will be held (London’s East district), there is a need for revitalization. It is clear that from the sporting point of view, it is positive, a great meeting of people. But London is a world capital, organized and has practically everything that its residents require.
And what about the next World Cup that will be in Brazil?
Jim O'Neill: I expect to receive an invitation to spend the four weeks of the World Cup there… generally, people think I’m an expert on Brazil, but that is not the truth. I’ve only been to the country six times, always between Rio de Janeiro and São Paulo. Anyway, analyzing the legacy for the nation and the state in which it is currently found, I feel that the competition is an excellent opportunity for Brazil to reduce its notorious infrastructure bottlenecks, mainly in the cities outside of the Rio-São Paulo axis.
And as a football fan, is it your dream to see a final between Brazil and England?
Jim O'Neill: (big laugh) No, England doesn’t have a good team. And furthermore, if we remember the times the two teams have played in World Cups, Brazil became the champion; we wouldn’t have the slightest chance.
By: Vinicius Medeiros
Photos Miguel A. Fonta