Brazil and the Impact of Economic Risk Cost

The headlines have been full of stories of the recent rioting in big cities across Brazil in the past week. Some estimates say that over one million people have taken to the streets to protest government corruption. They also claim to be upset over the way in which the Brazilian government found ways to spend a billion dollars to host the Olympics and World Cup, while rampant poverty continues.


It’s been interesting to read some of the foreign press’ surprise at the timing and vehemence of these protests, but to us long-time Brazil watches the marchers have arrived pretty much on time and as scheduled. The World Cup will take place in 2014 and the Olympics two years later. The protesters know that a year before the Cup is a great time to take to the streets: the Cup begins to loom large on the world stage and so will the protesters’ demands. I have no doubt that these protests their timing were not spontaneous events – they were carefully planned and will probably continue in one way or another for the next year.

I write about these events because what is happening in Brazil is yet another example of the conversion of economic risk cost into financial risks cost. As I have written elsewhere (, we are surrounded by a variety of economic risk costs (risk costs that are present but not accounted), and that when these costs convert over to financial risk costs (present and accounted), the conversion is often rapid and much more severe than expected. The economic risk cost index of doing business in Brazil skyrocketed on the two days on which the country was awarded the Cup and the Games. Therefore, the cost of doing business there increased as well. Anyone who did not bother to calculate those economic costs, and what they might be when they eventually became financial (as was inevitable in this country), was simply not paying attention.

Interestingly, the same thing is happening in Turkey, of course, which is, in my opinion, an even riskier place. Brazil’s protests were easy to predict. Turkey’s were as well, but the future of the latter is much harder to assess. Still, in both cases, the financial risk costs have started to rise. Smart investors should take a moment to recalibrate their analysis of both places, because neither is going back to the status quo ante any time soon.

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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