The region’s luck starts with climate and geography

MAKESHIFT stalls appear on every country road in Brazil, usually laden with bananas and coconuts. On the back roads of Brazil’s three southern states—Paraná, Santa Catarina and Rio Grande do Sul—the staple is loops of smoked sausage. Like the garden gnomes that sometimes stand guard, the Wursts are a legacy of immigrants from Germany, Poland and other central European countries who, along with northern Italians, settled the region from the mid-19th century.

Southern Brazil, an area the size of France with a population of 29m, feels like a region apart in other ways. Temperatures can drop below freezing on hilly terrain; shacks in poor neighbourhoods of coastal cities are topped with pitched roofs, as if built for snow. Southerners prefer yerba mate tea to cafezinhos, and look as much towards Uruguay and Argentina as to the rest of Brazil. Florianópolis, Santa Catarina’s capital, has flights to Buenos Aires but not to Belo Horizonte, the capital of Minas Gerais, Brazil’s second-biggest state.

These days, the difference southerners most want to talk about is an economic one. Although the region has not been spared the worst recession in Brazil’s modern history, its effects have been milder. The south’s unemployment rate has doubled to 8% since the recession began in 2014 but remains well below the national average of 11.8%. Sales-tax receipts have kept pace with inflation, a sign of resilient consumption. In São Paulo, Brazil’s industrial powerhouse, they have dropped in real terms. This strength has its origins in industrial history, but the region has lessons to teach the rest of Brazil, too.

Southern luck starts with climate and geology. The south is not hospitable to sugar cane and coffee, the commodities that drew Portuguese magnates to Brazil’s north-east, where they established an economy based on extraction and exploitation of slave labour. Mineral deposits encouraged concentrations of wealth and power in other regions. Southern farmland, good for such crops as wheat and maize, attracted destitute peasants who purchased smallholdings, which they tilled themselves. Even today, just one in seven farms in Rio Grande do Sul is larger than 80 hectares (198 acres).

Early rigours created a culture of self-reliance. “You had to be entrepreneurial just to survive,” explains Santa Catarina’s governor, Raimundo Colombo. Traditions of independence and family ownership shape today’s business; the south is the centre of Brazil’s equivalent of the Mittelstand, Germany’s medium-sized firms.

Habits of co-operation have been just as important. The south’s many credit co-operatives give firms better access to financing than is available in other parts of Brazil. Paraná’s Coamo, with 27,000 members, is Latin America’s largest agricultural co-operative. Southerners also banded together to educate their children, founding fee-paying “community universities” well beyond the main cities. Chapecó, a town of 180,000 in Santa Catarina’s interior, has two such schools.

This history has bequeathed to the region a relatively large middle class and lower inequality than in the rest of Brazil. Its GDP per person is above average. The government’s main contribution has been not to squander those advantages. The region’s pupils outperform most other Brazilian schoolchildren in international tests. Its governments have imposed less of the enterprise-crushing bureaucracy for which Brazil is famous. Southern states are among Brazil’s most competitive. In a ranking by the Economist Intelligence Unit, a sister company of The Economist, Paraná and Santa Catarina came second and third after São Paulo; Rio Grande do Sul placed ninth among Brazil’s 27 states.

This has helped give the south the sort of economy that Brazil would like to have, one that is diversified and largely independent of the commodity cycle. Extractive industries account for less than 1% of GDP, compared with an average of 4% in Brazil. Manufacturing produces 16-22% of output, compared with 12% nationally.

Foreign investment is boosting the south’s manufacturing advantage. BMW, a German carmaker, opened its first Brazilian plant in Santa Catarina two years ago; Renault, a French rival, is spending 740m reais ($218m) to expand one in Paraná.

The lively technology sector is largely home-grown. Florianópolis is one of Brazil’s main start-up hubs. Its tech firms pay more in taxes than does the city’s well-developed tourist sector. The capital cities of the other two states are close behind.

Many of the region’s tech firms grow out of its vocation for farming, fulfilling a Brazilian ambition to build high-value industries on its strengths in natural resources. A start-up in Pato Branco, a tidy city of 80,000 in Paraná’s interior, enables drones to map farmland. In Florianópolis, Agriness writes software to monitor the health of 1.6m sows, which produce 80% of Brazil’s pork.

Lower-tech firms are also moving up the value chain. In Concórdia, in Santa Catarina’s hilly interior, BRF, the world’s biggest exporter of chicken, has installed halal production for sales to the Middle East. It has set up a prosciutto smoker for a different clientele: foodies in São Paulo. A nearby unit of Embrapa, a federal agricultural-research institute, developed a breed of pig that produces low-fat meat for such folk. While agriculture accounts for a tenth of southern GDP, such ingenuity raises the share of farm-related industry to half.

Southerners fret that Brazil-wide failings, some of which the region’s governments are also guilty of, hold them back. Santa Catarina and Paraná have stabilised their finances, as the federal government is now trying to do. But Rio Grande do Sul has one of the country’s biggest deficits. On November 22nd the state followed Rio de Janeiro in declaring a state of “financial calamity”, a prelude to seeking federal aid. It is to lay off 1,200 workers and cut salaries.

Infrastructure is not as good as it should be. The 460km (286-mile) journey from Concórdia to Florianópolis can take 11 hours by lorry. The region’s governors admit they should work together more, especially on lobbying the federal government to improve roads and build railways.

Employers in the countryside fear a “rural exodus” that could hurt agribusiness in the long run, says Rafael Menute, who runs BRF’s operation in Concórdia. The south’s rural population has dropped from 18% of the total to 14% over the past decade. To encourage people to stay, the company is paying its 1,200 suppliers more. Pato Branco’s mayor, Augustinho Zucchi, has paved rural roads to make it easier for farmers’ children to reach the town’s night spots.

In the cities entrepreneurs worry about the costs of success. Everton Gupert, co-founder of Agriness, frets that rising property prices will drive graduates out of Florianópolis. Juliano Froehner, a serial entrepreneur whose latest venture is a service to remind parents to take their infants for health check-ups, spends ten days a month in the city of São Paulo. That is because it is still the biggest centre of finance and talent. But even self-satisfied paulistanos no longer ask him why he spends the rest of his time in the south.