Brazil: Leading the Bric’s Essay Example

aligns with the long-term sustainability of government and social security accounts. To enhance budget management, the government should gradually eliminate one-off revenues and contingency measures as they have negatively affected both the balance target and predictability of fiscal policy.

To address Brazil's increasing financing needs for development, it is recommended to involve the private sector in the long-term credit market instead of solely relying on them for distributing smaller BNDES loans. In order to manage the rising pension costs and maintain pensioners' purchasing power, it is advisable to tie future minimum pensions to a specific period's consumer price index. Furthermore, Brazil should consider adopting a uniform retirement age for both genders, as done in many other countries.

To simplify the public-private partnership framework and provide special loans to financially struggling municipalities, it is necessary to promote the use of scale economies. Alongside fiscal consolidation efforts, authorities should also acknowledge the long-term benefits associated with increasing public investment in railways. Brazil's history traces back to the 16th Century when it was colonized by Portugal. Initially, its main exports were lumber and gold before sugar, tobacco, and coffee became prominent.

In 1822, Brazil declared independence from Portugal and began trading with Northern Europe, the United States, and Latin America. In 1889, a republican government was established in Brazil. In 1937, Getulio Vargas assumed dictatorial power. To strengthen the country's economy, Vargas introduced protective measures such as imposing high tariffs to protect domestic producers and implementing currency exchange controls for stability. Additionally, Vargas encouraged the growth of state-owned enterprises in industries like oil and mining to support economic development.

The National Development Bank, which subsidized loans for infrastructure projects, was also created

by Vargas. Despite these projects aimed at promoting industrialization, Brazil remained reliant on exporting agricultural products. In the 1950s, Brazil faced a significant balance of payments crisis, leading Vargas to take his own life. In 1955, the government, led by Juscelino Kubitschek, continued with its policies of state-run industrialization, exemplified by the construction of Brasilia, the new capital city. The aggressive growth during this period resulted in increased imports and further worsened the balance of payments situation. As a consequence, inflation skyrocketed from 25% to 100% by 1964.

In 1964, a military coup implemented various measures such as compelling domestic savings, liberalizing financial markets, and offering subsidized loans to domestic industries. These actions resulted in an annual GDP growth of 10%. However, in 1982, this favorable situation suddenly changed due to a significant increase in inflation. To combat inflation, the government increased interest rates and reduced spending. As a result, Brazil experienced its most severe recession ever witnessed. This economic downturn ultimately led to the downfall of the military regime and paved the way for the establishment of democracy in 1985.

In spite of concerted efforts by the Brazilian government throughout the 1980s to revive economic growth in the country, they struggled to effectively manage inflation.

In 1990, Brazil faced severe economic issues, including inflation exceeding 1000%, a high Gini coefficient indicating income inequality above 0.6, and over one-third of the population living below the poverty line. Crime rates also soared during this period.

However, in 1992, a new finance minister introduced Plano Real as a solution to these challenges. This plan encompassed various measures such as maintaining high interest rates to control inflation, ensuring balanced government budgets,

introducing a new currency called the real, establishing a fixed exchange rate, reducing tariffs, and privatizing state-owned enterprises in Brazil (Daemmrich, p. 3).

Thanks to the implementation of these reforms through Plano Real, Brazil has made significant progress over time and currently holds the distinction of being Latin America's largest economy.

Brazil has a population of approximately 192 million, with the majority speaking Portuguese. The population is diverse, including African, Portuguese, Italian, German, Spanish, and Japanese ethnic groups. Roman Catholicism is followed by 74% of Brazilians. Brazil operates as a Federative Republic with 26 states. In 2010, Brazil's GDP reached 2.1 trillion with an annual growth rate of 7.5%. [pic] Agriculture contributes to 6% of Brazil's GDP and involves products such as soybeans, coffee, sugarcane, cocoa, rice livestock corn oranges cotton wheat and tobacco.

The industrial sector in Brazil accounts for 28% of the country's GDP and includes industries such as steel, commercial aircraft, chemicals, petrochemicals, footwear, machinery, motors, vehicles, auto parts, consumer durables, cement, and lumber. In contrast to this sector is the services industry which makes up 66% of GDP and includes mail services, telecommunications,
banking energy commerce,and computing.

As of 2011,Brazil has a trade surplus of $20 billion. Exports contribute $202 billion with China being the leading market at 15%, followed by the United States at 10% and Argentina at around 9%. On the other hand,the imports total approximately $182 billion. The United States is the major supplier at 15%, followed by China at 14% and Argentina at 8%.

Brazil imports machinery, electrical and transport equipment, chemical products, automotive part and electronics. The Exchange rate is approximately U.S. $1 = 1.79 Brazilian real as of (December 4,

2011). Loading Chart. Please Wait. [pic] The Brazilian economy performed well during the financial crisis and its strong and early recovery, including a growth rate of 7.5% in 2010, has contributed to its transition from a regional power to a global power. It is projected to continue growing in the range of 4% to 5%, making it the world's eighth-largest economy which is expected to rise to fifth within the next few years.

Under former President Lula, Brazil witnessed a substantial increase in exports, economic growth, and the establishment of social programs. Consequently, millions of Brazilians were lifted out of poverty, resulting in the rise of a dominant middle-class population. This progress has made internal consumption vital for propelling Brazil's economic expansion. President Dilma Rousseff, who assumed office on January 1, 2011, has demonstrated her dedication to continuing the economic strategies initiated by her predecessor. These measures encompass maintaining fiscal stability, effectively controlling inflation rates, and sustaining a flexible exchange rate.

Brazil saw a close to 6% inflation rate in 2010 because of increased employment and domestic demand. This led to the central bank raising interest rates and the Rousseff government announcing spending cuts for 2011. The country also experienced economic growth, attracting foreign currency inflows and causing a nearly 40% rise in the value of the Brazilian real since early 2009. To prevent excessive appreciation, the government took steps like increasing dollar reserves and enforcing capital controls. However, Brazil still welcomes and supports foreign investment.

Brazil, the largest recipient of foreign direct investment (FDI) in Latin America, is receiving billions of dollars in investments from the United States. The Brazilian government plans to invest in sectors such

as off-shore oil, nuclear power, and infrastructure. Furthermore, investments are being made in roads, airports, sports facilities, and more for upcoming international athletic competitions leading up to the 2016 Rio Olympics. Since 2003, Brazil's currency has been steadily appreciating due to foreign capital entering the market. The central bank estimates that Brazil's economy will attract a record $55 billion in FDI in 2011. According to an IMF forecast, developing economies are expected to expand by 6.5 percent compared to developed economies at 5 percent growth. Economists predict a 4 percent growth for Brazil this year as efforts increase to combat inflows of capital caused by high inflation-adjusted interest rates globally.

In November 2011, according to www.tradingeconomics.com/Brazil, Brazil reduced its interest rates from 11.5% to 11%. This reduction coincided with the country experiencing strong economic growth of 7.5%, the highest seen in over twenty years. Consequently, there was an increase in the value of the Brazilian currency with a specific appreciation of 4.6% against the dollar in 2010 and an impressive appreciation of 32.7% in 2009.

The Brazilian government has increased the tax on loans from foreign banks and companies to decrease the amount of dollars coming into the country. This tax now applies to all loans under two years instead of just 360 days. Local companies have been negatively impacted by the appreciation of the currency because many financial officers borrowed money at low interest rates outside Brazil and invested it in Brazil, where interest rates are significantly higher. (Source: http://www.businessweek.com/news/Brazil) Given the weak global economy, investors are predicted to continue searching for better investment prospects in Brazil.

To prevent the short-term appreciation of the real

and boost exports, the government should temporarily raise the tax on loans taken by banks and companies abroad from 6% to 10%. This policy should be reevaluated later and potentially modified based on the state of the economy. Inflation has been rising since late 2010, primarily due to higher prices in food, beverages, and energy sectors. However, these price increases have recently declined while service prices, especially for housing and transport, experienced an upward trend in early 2011. The currency's appreciation has helped mitigate price increases since mid-2009.

Inflation expectations have increased and year-on-year inflation has exceeded the official monetary target ceiling since June, due to carryover from late 2010. [pic] Source: www. tradingeconomics. com/Brazil It is recommended to use a combination of policy instruments to mitigate the risks associated with short-term capital inflows in the current macroeconomic situation in Brazil and other countries. However, policy should not try to counterbalance the appreciation of the exchange rate, as long as it is a result of structural changes in the economy that have raised the equilibrium value of the real.

It would be ineffective to do so, as it would only push real appreciation into the inflation column and hinder necessary economic adjustment. This could also invite further destabilizing capital inflows. The current policy combination of exchange-rate flexibility, implemented after abandoning the peg in January 1999, along with an inflation target remains the best choice to avoid sudden adjustments like those seen in the past. These policies can be complemented by counter-cyclical fiscal measures to reduce pressures on domestic demand and inflation. Prioritizing rising public saving is important. Implementing structural reforms to strengthen the macro-prudential framework would enhance

the economy's resilience against asset and credit bubbles. Short-term capital controls may be used, especially if they successfully redirect flows toward longer maturities on a sustainable basis. In the medium term, expanding financial markets will create more investment opportunities and enable easier assimilation and effective utilization of capital inflows.

(http://www.oecd.org/dataoecd/12/37/48930900.pdf) Fiscal Framework

The OECD report states that Brazil improved its fiscal framework in 2000 with the implementation of the Fiscal Responsibility Law. These improvements included enhancing stability in accessing foreign capital and reducing vulnerability to exchange rate shocks. The report suggests that modifying the framework could promote growth prospects while still achieving income redistribution goals. It also highlights how better policy institutions and careful fiscal management have created a buffer that helped mitigate the impact of the economic downturn in 2008-09 (Source: http://www.oecd.org/dataoecd/12/37/48930900.pdf).

From late 2009 to 2010, public spending increased as the economy improved, leading to higher domestic demand. Currently, the government is reversing the fiscal measures implemented during the crisis. They have announced intentions to reduce the federal budget for 2011 by BRL 50 billion, approximately 0.5% of GDP compared to that of 2010. This budget cut will alleviate inflationary pressures and decrease reliance on monetary policy caused by substantial capital inflow and currency appreciation.

In this sense, the government has increased the surplus target for 2011 and set primary surplus targets for the next three years in the 2012 draft Budget Law. These targets are in line with reducing public debt. The draft also includes the Greater Brazil Plan (Plano Brasil Maior), a package of measures aimed at improving competitiveness in key tradable sectors. These measures total approximately BRL 21 billion (0.6% of GDP). If

economic growth in 2012 is lower than the assumed 5%, spending may need to be restricted to meet the fiscal target.

Given Brazil's needs, it is important to prioritize spending in areas that will have positive long-term growth effects or achieve social objectives. The government plans to focus on controlling mandatory spending while protecting social programs and some infrastructure projects. Allocating funds to more efficient uses in infrastructure can potentially boost medium-term growth. Targeted social spending will also play a crucial role in improving social equity, especially if support is directed towards helping the young.

Currently under discussion in Congress is a proposal to set a 2.5% per year ceiling on the real growth of the federal government payroll and other outlays. Additionally, there are talks of severing the link between the minimum pension and the minimum wage, while still maintaining the pension's value in real terms. These measures would serve to restrain spending. According to a report from the OECD (http://www. oecd. org/dataoecd/12/37/48930900. pdf), it is recommended that the fiscal target be aligned with the long-term sustainability of government and social security accounts.

The government should stop using one-time revenues and contingency measures to improve budget management. These practices have undermined the balance target and predictability of fiscal policy. Past examples include discounting investment spending and using previous year's savings to meet targets. The authorities have indicated they will not use these methods for 2011 and 2012 and should stick to this promise. To further strengthen fiscal control, commitments can be made to reverse any deviations from deficit or debt targets or implement escape clauses in unexpected events. Implementing an expenditure growth ceiling, as seen in the

Netherlands and Sweden, would enhance fiscal control. A first step towards this would be setting a limit on public payroll spending growth. However, for an expenditure ceiling to be effective in Brazil, it is necessary to significantly reduce widespread revenue earmarking, as recommended in previous OECD Economic Surveys. Getting rid of revenue earmarking would increase budget flexibility. The high tax burden, compared to other emerging-market economies, combined with a complex and fragmented tax system, reduces after-tax returns and discourages investment.The text discusses the challenges and potential solutions related to value-added taxes at the state level. These taxes are currently assessed on an origin basis, which leads to high compliance costs. Additionally, taxes on enterprise turnover, rather than value added, in certain sectors create distortions in firm decision-making. The government plans to address these issues by proposing payroll tax relief and unifying states' VAT rates. State finance ministries have also discussed gradually harmonizing interstate ICMS rates by 2012. The proposal also includes consistent refunding of tax claims from exports and investments.

One way to enhance the current tax system is to merge the existing value-added taxes (VATs) with municipal taxes on specific services, the tax on industrial products, and various federal contributions. This would create a unified value-added tax that provides full credit for exports, capital goods, and intermediates purchases. Additionally, by consistently using value added as the tax base instead of turnover, further improvements can be achieved. If varying tax rates between states are kept, taxes should be based on the destination of goods or services to prevent distortions in interstate trade and reduce the incentives for competitive tax battles between states.

If the budget allows,

investment incentives could be enhanced by increasing depreciation allowances for corporate income taxes. To offset the projected decrease in states' VAT, it is advisable to implement corresponding increases in federal VAT. This approach is supported by cross-country analysis indicating that consumption serves as a growth-friendly basis for taxation (Arnold et al., 2011). Capital Markets: The establishment of the national development bank (BNDES) aimed to address a market failure and has thus far been beneficial, as private lenders lacked the capacity to offer long-term financing.

The liquidity injection provided during the crisis was beneficial in preventing a credit crunch. However, it could now hinder private entry into this market segment as the situation has stabilized. BNDES has wisely begun to withdraw from offering short-term working capital for businesses (source: http://www. oecd. org/dataoecd/12/37/48930900. pdf). To meet Brazil's financing needs as the country progresses, it is recommended to increase private-sector involvement in the long-term credit market, going beyond their current role as distributors of smaller BNDES loans.

One way to help banks in accessing long-term funding is to remove current limitations on savings accounts, particularly those related to their uniform remuneration and maturity, as well as the directed credit obligations that come with them. Additionally, promoting the growth of long-term capital markets would enable banks to obtain long-term bond financing. However, even if the challenges related to funding for private banks and the resulting maturity mismatch are resolved, the exclusive access of BNDES to relatively inexpensive funding will impede the private provision of long-term credit.

To support private banks' entry into long-term financial markets, their funding costs can be adjusted to match BNDES' current lending rates. Additionally, borrowers can receive

a direct tax credit, regardless of the lender they choose. It is recommended to gradually phase out this tax credit once private lenders establish a strong presence in the market, preventing a sudden reduction in credit availability. (Source: http://www.oecd.org/dataoecd/12/37/48930900.pdf)

The existence of crime and corruption presents a significant barrier to Brazil's economy and market growth. This crisis undermines the foundation of a prosperous and civilized society or market, which relies on the rule of law. Investors must have unwavering trust in an uncorrupted system. Without an honest system of checks and balances, investment and commerce cannot flourish.

The challenges in Brazil primarily stem from the notable disparity between the wealthy and impoverished. Historically, there was an absence of a middle class, leaving little opportunity for those on the lower economic spectrum to better their circumstances. Consequently, many turned to crime as their sole alternative. Nevertheless, recent economic expansion in the country has fostered a sense of hopefulness. The corruption present in Brazil is especially alarming since it extends beyond isolated minor offenses and permeates throughout the system and institutions. This corruption jeopardizes all the advancements that have been achieved.

Both high-ranking government officials, including former president Fernando Collor de Mello and former mayor of Sao Paolo, Paulo Maluf, have been implicated in corrupt activities. In 1992, Collor resigned to evade impeachment following the exposure of his involvement in influence peddling schemes. These schemes led to the transfer of millions of dollars to accounts established by his campaign treasurer. Similarly, Maluf faced arrest for redirecting hundreds of millions of dollars to personal bank accounts held in Switzerland and the Channel Islands.

Out of the 513 members in the lower house

of Congress, 147 are currently facing investigations or criminal charges in the supreme court. In the Senate, 21 out of 81 senators are also under investigation or facing charges. The majority of these charges relate to violations of campaign-finance laws or embezzlement of public funds.

The Supreme Court recently achieved a significant milestone by successfully convicting two politicians for corrupt practices. This marked the first conviction since democracy was reinstated in 1985.

To avoid impeachment consequences that would make them ineligible to run for office, many legislators who find themselves entangled in serious legal troubles choose to resign before they face impeachment.

The text discusses a new law in Brazil that will disqualify individuals convicted of serious crimes or those who resigned to avoid impeachment from holding political office for eight years. The law, known as ficha limpa ("clean record"), was passed quickly after a petition signed by 1.5 million citizens and applies to both future convictions and individuals with existing criminal records or under investigation during the current congress. This law is seen as a revolution in Brazilian politics and comes after previous attempts at political reform failed. In addition, the authorities in Brazil have established a Social Fund in December 2010 to ensure that future generations receive their fair share of oil revenues, recognizing that petroleum reserves are limited resources (source: http://www.economist.com/node/16542611).

The present plans indicate that the actual profits from it will be utilized for various education measures, along with other social and environmental initiatives. The fund's expenditure must adhere to the law, which prioritizes cost-effective programs. Moreover, it is crucial to ensure fair distribution of oil revenues across all regions. The current fiscal framework is

functioning effectively, as evidenced by consistently achieving the primary surplus goal and a decline in the public debt-to-GDP ratio.

However, the framework will require adjustments in the medium term to accommodate a new scenario where tax revenue will be mainly derived from oil windfalls and the aging population will strain public finances. (http://www. oecd. org/dataoecd/12/37/48930900. pdf) As a short-term solution, it is recommended to create a Social Fund that promotes fairness between generations. The assets of this fund should be invested in a variety of ventures to optimize returns, including foreign investments. By doing so, the risk of Dutch Disease can also be mitigated.

Long term recommendations: Implementing firewalls to prevent political interference would decrease the likelihood of natural resource revenues being used for short-term political purposes. This can be achieved by assigning the management of the fund to an agency whose good governance is guaranteed through clearly defined objectives determined in a democratic manner. To ensure the effective utilization of these revenues, local governments should be incentivized to pursue efficiency enhancements. Previous cases in Brazil and other locations have demonstrated that oil windfalls frequently led to escalated expenditures without corresponding enhancements in socio-economic results.

The federal government has the potential to increase incentives for improving efficiency by implementing rewards for strong performance at the sub-national government level. (http://www. oecd. org/dataoecd/12/37/48930900. pdf) One of the main challenges facing public finances is the social security pension system, which currently accounts for almost one third of total expenditures. Brazil's pension system is expensive and its assets and liabilities are not in line. Additionally, the system's sustainability is at risk due to changing demographic trends and continuously rising pension benefit levels.

(World Bank, 2011b).

The high levels of expenditure in Brazil's pension system, considering the country's demographic structure and level of development, are significantly greater than the average rates in the 34 OECD member countries. Full-career workers with average earnings have a gross replacement rate of 86%, compared to the average of 57% in the OECD. Similarly, the net replacement rate is 97%, exceeding the average of 69% in the OECD (OECD, 2011a). These current benefit levels are partly a result of minimum pension benefits being indexed to increases in the minimum wage, resulting in real increases of over 70% in the past decade.

Furthermore, retirement ages are relatively low in the RGPS system. The minimum retirement ages for men and women are waived after contributing for 35 years and 30 years, respectively. Approximately 75% of workers retire after fulfilling the minimum contribution requirement, with average retirement ages of 54 for men and 51 for women. For women, this means they can enjoy almost an equal number of years receiving benefits as they did contributing (World Bank, 2011b).

Short term recommendations: Brazil should consider equalizing the retirement age for men and women, as is the norm in most OECD countries. Additionally, minimum pensions should be indexed to the consumer price index for a number of years to reverse past fast pension increases and preserve the purchasing power of pensioners. Currently, a retirement age of 65 years or 40 years of contributions, which are being discussed within the government, would align with the practice in most OECD countries.

In a second phase, the retirement age needs to be connected to the growing life expectancies. To enhance the actual retirement age, it

would be crucial to significantly elevate the minimum retirement age and establish stricter penalties for retiring early. Brazil should also contemplate raising the minimum contribution requirement of only 15 years in order to receive a full pension at the designated retirement age. ECO/WKP (2011)69 suggests long-term suggestions: A more suitable long-term guideline for adjusting pension benefits could be an average of consumer price inflation and average wages, similar to Switzerland's approach.

Applying a specific formula can ensure that pensioners benefit from current productivity gains. According to this formula, it is estimated that pension benefits would have experienced approximately 42% of the increase in average wages over a span of 25 years, assuming an annual productivity growth rate of 3%. These necessary reforms could be gradually implemented or exempted for current and near-term pensioners who are unable to adjust their savings during their working years to gain political acceptance. It is crucial to control pension expenditures from a long-term fiscal perspective in order to effectively manage public finances in Brazil. The country is expected to undergo rapid aging of its population in the next decade, which aligns with trends seen among emerging-market economies. These demographic changes will have an impact on the macroeconomic environment. Without policy changes, the decline in working-age population growth could significantly diminish potential output growth by mid-century. However, it may be challenging to estimate the precise impact of the Growth Acceleration Program (PAC) on productivity growth, although it might partially offset this decline. There is evidence suggesting that Brazil did not fully take advantage of its growing working-age population, resulting in missed opportunities for economic growth due to lack of sufficient investments in

human capital and inadequate social and economic institutionsAs the population ages, there will be a shift in public spending towards pensions, healthcare, and long-term care. This change in spending priorities will result in reduced investment in education, which will have a negative impact on public finance. According to the life-cycle theory, population aging is expected to decrease domestic savings, with public pensions playing a significant role in Brazil. The saving behavior of both poor and non-poor households also contributes to this situation. To counteract the effects of population aging on potential output growth, it is recommended to focus on faster capital accumulation. In addition, labor-market policies should aim to reduce poverty among households in the economy (Sources: Queiroz and Turra (2010), ECO/WKP (2011)68 - OECD 2011).

Increased incomes in the lower end of the income distribution may indicate higher levels of household savings when basic household needs are met.