MEPP Brazil Economy Group2

8/3/2019 MEPP Brazil Economy Group2

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The Brazilian Economy: Growth and

Development

Project Report

GROUP-II:

Lanka Anirudh - 11DM-061

Aaushy Sangai - 11HR-002

Sahil Gandhi 11FN-086

Sachin Pal 11FN-085

Sumeet Joon 11DM-162

Megha Madan 11DM-71


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Brazil Statistics:

Geography:

Area: 8,511,965 sq. km. (3,290,000 sq. mi.); slightly smaller than the U.S.Capital--Brasilia (pop. 2.5 million)Terrain: the world's largest wetland area; and coastal lowland.Climate: Mostly tropical or semitropical with temperate zone in the south.

People:Nationality: Brazilian.Population (2010): 190 million (slightly less than what India has gained only in last ten years).Annual population growth rate: 1.17%.Ethnic groups: African, Portuguese, Italian, German, Spanish, Japanese etc.Religion: Roman Catholic (74%).Language: Portuguese.Education:Literacy (2009)--90.3% of adult population.Health:Infant mortality rate (2009)--22.5/1,000.Life expectancy (2010)--73.1 years.Work force (2009 est.): 101.7 million.

Government:Type: Federative republic.Independence: September 7, 1822.Constitution: Promulgated October 5, 1988.Branches:Executive--president (chief of state and head of government popularly elected to no more than two 4-year terms).Legislative--Senate (81 members popularly elected to staggered 8-year terms), Chamber ofDeputies (513 members popularly elected to 4-year terms).Judicial--Supreme Federal Tribunal (11 lifetime

positions appointed by the president).Economy:GDP (nominal exchange rate): $2.5 trillion.GDP (purchasing power parity): $2.3 trillion.Annual real growth (2011 est.): 3.5%.Per capita GDP (nominal exchange rate): $12,917.Per capita GDP (purchasing power parity): $11,845.Natural resources: Iron ore, manganese, bauxite, nickel, uranium, gemstones, oil, wood, and aluminum. Brazilhas 14% of the world's renewable fresh water.Agriculture (6% of GDP):Products--soybeans, coffee, sugarcane, cocoa, rice, livestock, corn, oranges, cotton,wheat, and tobacco.Industry (28% of GDP): Types--steel, commercial aircraft, chemicals, petrochemicals, footwear, machinery,

motors, vehicles, auto parts, consumer durables, cement, and lumber.Services (66% of GDP): Types--mail, telecommunications, banking, energy, commerce, and computing.Trade: Trade balance (2011)--$20 billion surplus.Exports--$202 billion. Major markets--China 15%, UnitedStates 10%, Argentina 9%.Imports--$182 billion. Major suppliers--United States 15%, China 14%, andArgentina 8%.Exchange rate (October 3, 2011): U.S. $1 = 1.75 Brazilian Real.

The economy of Brazil is the world's seventh largest by nominal GDP and eighth largest bypurchasing powerparity. Brazil is one of the fastest-growing major economies in the world with an average annual GDP growthrate of over 5 percent. The Brazilian economy has been predicted to become one of the five largest economies inthe world in the decades to come.
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Objective of the Study:

To understand the macroeconomic policies and study their implication on the Brazilian economy in light of thevarious internal as well external factors.

Brazil economy history:

Spectacular growth, 1968-73:The post-1964 reforms and other policies of the military government, together with the state of the worldeconomy, created conditions for very rapid growth between 1968 and 1973. In that period, the average annualrate of growth of GDP jumped to 11.1%, led by industry with a 13.1% average. Within industry, the leadingsectors were consumer durables, transportation equipment, and basic industries, such as steel, cement, andelectricity generation. External trade expanded substantially faster than the economy as a whole.

Growth with debt, 1974-80:

On October 1973 members of OPEC announced that they would no longer export petroleum to the United Statesand its western allies. The oil prices quadrupled by November .

Brazil was relying on imports for its 80% of oil comsumption.Its imports grew from 6.2Billion $ in 1973 to12.6Billion $ in 1974 .And this resulted in a change in trade balance which shifted from slight surplus to adeficit of 4.7Billion $ in 1974.

Brazils FX rate increased and became inflationary as imports increased and exports slid. Instead of devaluingthe currency and implementing growth reducing policies Brazil began a new development plan to create newcomparative advantages.

This strategy had the effect of promoting economic growth but it did increase the import requirements of thecountry which increased the balance of payments deficit. The deficit was however financed by foreign debt and

with its new import substitution methods and exports expansions, policy makers were hoping that the debtwould allow for growing trade surpluses, thereby allowing the repayment of the debt.

The Giesel government decided to push economic growth with Second National Developement Plan (PNDII). Itconsisted of a major investment plan whose basic aim was :

1. Substitution of major import products such as steel ,aluminium, copper and capital goods.

2. Rapid expansion of economic infrastructure hydro and nuclear power , alcohol production

The purpose of this was to counter the effect of oil crisis and maintain economic growth and to change thestructure of economy from import substitution, export diversification and expansion .It was also a means offinancing current account deficit .The result of this was that growth was maintained at 7% for rest of the decadewith industry expanding at a rate of around 7.5% .

The choice of growth during this time resulted in a big increase in countries foreign debt as it has to pay for thehigher oil bills along with the import of industrial goods .The government growth was justified by the fact thatthe foreign exchange resulting from investment programs would be able to generated revenues to repay itsdebt .Most of the policy measures taken by government were reversed in around 1980 .Full indexation wasintroduced and prefixed devaluation was abolished . , the current-account deficit increased from US$1.7 billionin 1973 to US$12.8 billion in 1980. The foreign debt rose from US$6.4 billion in 1963 to nearly US$54 billionin 1980.

1980-1989:

In 1979 a second oil shock further increased Brazils balance of payment problems as it also had to cope withhigh rates of world interest rates. The government continued to increase its borrowing whilst trying to maintain

high growth strategies. In 1981 the Mexican crisis occurred and disabled Brazils access to world financialmarkets. Inflation accelerated as a result of foreign exchange devaluation and a high public deficit. By the mid


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1980s domestic debt nearly replaced foreign debt as Brazils main economic problem. A significant proportionof the debt was incurred state enterprises and because they were legally not allowed to declare bankruptcy theburden was transferred to the government which led to further economic problems.

The rate of growth of brazil was high in the 1980s . The real GDP grew at 7.2% with the major sectors such astransportation and communication growing at 12.7% The inflation rate however remained at 110% annually .

The high growth was due to agriculture sector recovery from previous years of drought and famine . Increasedindustrial production resulted from strong consumer demand resulting from inflationary expectations anddecline of indexing .

The total devaluation of the cruziero was 54 % instead of the planned 40% .The penalties were raised in 1980sand exemptions were reduced which resulted in further increased power of state and local environmentorganisations

Stagnation, inflation, and crisis

To attack the soaring debt, the government policies stressed exports food, natural resources, automobilesand expanded petroleum exploration by foreign companies. In foreign relations, the objective was to establishties with any country that would contribute to Brazilian economic development. Washington was kept at a

certain distance, and the North-South dialogue was emphasized.In 1983, the economy floundered as GDP declined by 5.0%, the impact of which was accelerated by risinginflation and the failure of political leadership.

The Hyperinflation in Brazil, 1980-1994

Hyperinflation existed in Brazil from 1980 until 1994, and escalated to the point that the price level hadincreased to a factor of one trillion. The root of the problem was due to the method the government wasemploying to finance its projects. The source of this inflation was the expansion of the money supply. Thegovernment financed its operation and its development projects not out of taxes or borrowing funds but bysimply creating money.Due to this method, Brazil experienced high inflation rates that peaked out at 5,000% peryear. Individuals and companies cease saving their money because of the fear that the amount owned today willbe worth much less tomorrow. Any foreign company that had subsidiaries in Brazil were negatively impacted

because these companies would not turn a profit due to the fact that the income would have no value. Inaddition, any person or country with securities from Brazil, such as bonds, would essentially lose theirinvestment because when hyperinflation reaches the levels in did in Brazil, the money becomes worthless.

Reasons for hyperinflation :

The inflation was very convenient to the government; the Mint printed money around the clock, at avery low cost to the Treasury (the Treasury was collecting an inflationary tax); the Budget was fixed innominal values, which were corroded very quickly, leaving the government with a carte blanche to

spend the budget; by delaying payments (to suppliers, to servants, to people who won demands inJustice), the government was in fact getting discounts.
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Monetary Adjustments: any money left in the bank was automatically paid interest, overnight .Themiddle class had their savings protected from inflation corrosion, and didnt pressure the Governmentfor a tougher combat against it; the majority of Brazilians who didnt have any savings left to investinto the bank system combated this system.

In March of 1986, President Jose Sarney announced the Plano Cruzado, anchored in practically only one idea:

all prices of the Economy were frozen (including salaries, but these had an increase first). The Plan worked finefor a few months but natural sequels soon appeared: forbidden from changing prices, the producers eitherrefused to sell (creating a black market for several products) or just relaunched "new" products with a "new"higher price. Late in 1986, right after the elections, the government came with Plano Cruzado II, with a generalincrese of prices and taxes.

From 1986 through 1994, a few other heterodox Plans were deployed. In 1987, the Bresser Plan again frozeprices and salaries, besides cutting budgetary investments; outcome: accumulated inflation for 1987 was 366%.In 1989, the Summer Plan once again froze prices and proposed the privatization of State companies and thedismissal of civil servants; in December alone, the inflation was over 50%.

In 1990, the wildest plan of all, the Collor Plan. President Fernando Collor had taken office promising to kill the

inflation with only one shot; accumulated inflation from March 89 to March 90 had been almost 5,000%. Themain measure of the Collor Plan was to freeze all financial assets in bank accounts which exceeded a fewthousand dollars (the money would be gradually returned to investors only after eighteen months); again, pricesand salaries were frozen, budget expenses were cut, taxes were increased; the plan brought recession to Brazil,but didnt stop inflation.

In 1991, the sequel: Plan Collor II; besides the usual prices freezing, this plan attacked the indexation: all shortterm financial transactions (which paid interest daily) were prohibited; the Plan Collor II failed.

The Real Plan

The fiscal deficits were a major component of inflation .Indexation was a major component of Brazilianinflation. Indexation means that every buyer or seller knew what the recent inflation rates had been, and wouldfactor that index into their prices, contributing to increase the future inflation.

In 1994, the Real Plan was founded on three key elements:

i) a fiscal strategy centered on the approval of the Constitutional Amendment creating the SocialEmergency Fund, while other reforms were enacted through a prolongued period of time;

ii) Monetary reform process to take place during a few months of voluntary adoption of a new unit ofaccount later to become the national currency;

iii) Opening the economy with aggressive trade liberalization and a new foreign exchange policy".

The Real Plan proposed was:i) Fiscal strategy. The Constitutional Amendment mentioned was approved to extend the period of the Social

Emergency Fund. Such fund was comprised of a few taxes and should be used in some specific programmes,including those "of great economic and social interest"; in practice, what happened was that the government hadmore money in his hands and more freedom to spend it. The "other reforms enacted through a prolonged periodof time" referred to the legal reforms approved and attempted during the two terms of President Cardoso; mr.Cardoso managed to privatize many State owned companies (including banks, steel plants, one of the largestmining companies in the world, all the telecommunication companies and others - also worthy mention, themonopoly of Petrobras was broken) and also promoted significant changes in the civil service and in the socialsecurity of the private sector; other Reforms were attempted but failed: the reformm of the social security of thepublic sector, the labor legislation, the tax system, among others.ii) Monetary reform. The idea behind the Real Plan was to create an index, called URV (Unidade Real deValor - Real Unity of Value), with daily variations, pegged to the dollar; prices would still raise in CruzeirosReais, but as the URV would also raise daily, the prices would be fairly constant in URVs (as much as they

would in dollars); all economic agents would be encouraged to quote their prices both in Cruzeiros Reais (whichwould be effected by the high inflation rates) and in URVs (which, pegged to the dollar, would remain pretty
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stable). On July 1st 1994, the Cruzeiro Real ceased to exist; the URV became the Real. Because all economicagents had had enough time to realign their prices, there was not unbalances among them; by creating a super-index (the URV), the government managed to beat indexation.iii) Opening the economy. In the first months of the plan, international scenario was in such situation thatinvestors saw advantages in pouring massive amounts of capital in Brazil; in consequence, the real gained valueagainst the dollar (US$ 100 = R$87), which helped importers and harmed exporters. free market and free tradewas introduced at the cost of some companies failing and some people loosing jobs in Brazil in the short term .But eventually this will lead to a prosperous economy. Tor some time, Brazil lived with an overvalued currencywhich along with explosion of internal debt, closing of several industry sectors.This helped increase competition

and keep inflation down.

1990-Present:

The first post-military-regime president elected by popular suffrage, Fernando Collor de Mello (199092), thenew administration introduced a stabilization plan, aimed at removing restrictions on free enterprise, increasingcompetition, privatizing public enterprises, and boosting productivity. But, political instability increasedsharply, with negative impacts on the economy. The real GDP declined 4.0% in 1990, increased only 1.1% in1991, and again declined 0.9% in 1992. In 1993 the economy grew again, but with inflation rates higher than 30percent a month, the chances of a durable recovery appeared to be very slim. A high-level team was put in placeto develop a new stabilization plan, The stabilization program, called Plano Real had three stages: theintroduction of an equilibrium budget mandated by the National Congress a process of general indexation(prices, wages, taxes, contracts, and financial assets); and the introduction of a new currency, the Brazilian real,pegged to the dollar. The Real Plan successfully eliminated inflation, after many failed attempts to control it.The economy grew 4.4% in 2000, In 2004 Brazil saw a promising growth of 5.7% in GDP, following 2005 witha 3.2% growth, 2006 with a 4.0%, 2007 with a 6.1% and 2008 with a 5.1% growth. Due the 2008-2010 worldfinancial crisis, Brazil's economy was expected to slow down in 2009 between a decline of -0.5% and a growthof 0.0%. In reality, economic growth as continued at a high rate with economic growth hitting 7.5% in 2010.

Brazil GDP growth and trends in per capita income and key

resources:

Seventh largest economy in the world by nominal GDP. Eighth largest by purchasing power parity. Free markets (Process determined by Supply and demand).

Inward oriented economy.The GDP growth (annual %) in Brazil was last reported at 7.49 in 2010.Brazil is one of the fastest growingemerging economies in the world. With large and growing agricultural, mining, manufacturing and service


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sectors, Brazil economy ranks highest among all the South American countries and it has also acquired a strongposition in global economy.

HIGH GROWTH IN 70s :Brazil experienced rapid growth in 70s because of structural and economic reforms in the country.During the first oil crisis in 1973 oil ,USA and Brazil two countries took it upon themselves to develop otherrenewable sources of energy.The Brazil government invested largely in state owned oil company to increasePetroleum Production & in R& D to develop sugar cane based ethanol as viable source of Energy. Also, throughout the world Finance was available on low interest rates & Brazil opted for a high growth policy. Thus leadingto higher investments on Infrastructure & Business. It adopted renewed strategies of import-substitutionindustrialization and of economic diversification. In the mid-1970s, the regime began implementing adevelopment plan aimed at increasing self-sufficiency in many sectors and creating new comparativeadvantages. Its main components were to promote import substitution of basic industrial inputs (steel,aluminium, fertilizers, petrochemicals), to make large investments in the expansion of the economicinfrastructure, and to promote exports. Brazil was able to raise its foreign debt because, at the time, theinternational financial system was awash in petrodollars and was eagerly offering low-interest loans. By the endof the 1970s, however, the foreign debt had reached high levels.

DECREASING GROWTH RATE OF GDP IN THE 80'S

Brazil has an inward oriented economy that is most of the GDP contribution is due to consumption within thecountry.Relatively low growth rate of the domestic components of final demand which combined, with its highweight in total final demand explains the low contribution of this type of expenditure to the GDP growth ratesince the 1980s, Particularly low growth in government expenditures .External sector contributing to GDPgrowth rate was very unstable.Because of the 2nd Oil Crisis the world economies became unstable and the interest rates rose. Investmentsdecreased.

Also the accumulated loan & interests increased largely due to the high growth policy followed.

Agriculture: Agriculture is playing a vital role in sustaining the high growth rate for Brazil. Agricultureincludes forestry, hunting, and fishing, as well as cultivation of crops and livestock production. The valueadded(% annual growth) was reported 5.78% in 2008. However, percentage share of agriculture in Brazil GDPhas gone down from 20% in 1960s to 6% percent in 2008 and GDP is more focussed on Services sectorgrowth.Manufacturing: The Manufacturing; value added (annual % growth) in Brazil was reported at 3.18 in 2008.The Manufacturing; value added (% of GDP) in Brazil was reported at 16.00 in 2008. Manufacture as a % ofGDP has gone down from 33% in 1980s to 16% in 2008.Services: The Services; value added (% of GDP) in Brazil was reported at 68% in 2010, they include valueadded in wholesale and retail trade (including hotels and restaurants), transport, and government, financial,

professional, and personal services such as education, health care, and real estate services. Employment in


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services over last 20 years has crossed 50% of total employment and touching 60% in recent years. Services aspercentage of GDP has increased from 40% in 1960 are 68% in 2010.Per capita income: The GDP per capita is obtained by dividing the countrys gross domestic product, adjustedby purchasing power parity, by the total population.

The GDP per capita (constant US dollar) in Brazil was last reported at 10710.07 in 2010, according to a WorldBank report released in 2011. Per capita Income has increased from 258.21$ in 1965 to 10710.07 in 2010.The GDP per capita growth (annual %) in Brazil was last reported at 6.55 in 2010. Brazil GDP Per Capita, whenadjusted by purchasing power parity, stands at 10304 US dollars.

Role of Monetary Policy in controlling Inflation:

Brazil has a financial system which rivals that of most developed countries. Brazil has opted to use interest rates

as an instrument to control inflation. Per Banco Central Do Brasil, using interest rates to control inflation is theoption preferred by the majority of the central banks in Brazil including Brazils Central Bank (BCB). Thismethod of using interest rates is known as an inflation-targeting regime.

The Organization for Economic Co-operation and Development (OECD) has expressed its opinion on Brazilsfinancial system and believes the cost of capital in Brazil is incredibly high compared to international standards.The amount banks charge on their loans even for very good rated companies is well above what is chargedworldwide, which in turn creates enormous agency costs between private agents and financial institutions. Theconsequence of this is that firms invest less and individuals consume also less than they could.

A look at Brazils public opinion will show hopes that the price stability which has been sustained in recent

years would remain, but also that there could be an immediate reduction of real interest rates. These wishes aresomewhat contrasting since the increased interest rate is the direct result of the somewhat new inflation-targeting regime which has given them the sustained price stability. Yet another concern is for a less volatileexchange rate and the reduction of foreign exchange interventions that reduce Brazils international reserves andthe pressure this induces on prices.

Monetary Policy Committee ( Copom )

As documented by Banco Central Do Brasil, since the adoption of the inflation-targeting regime, Central BankPolicy has been based upon some basic principles implemented by the Monetary Policy Committee (Copom).

They evaluate the future trend of inflation. This is done by using the best available information, both

quantitative, including structural models, simulations and other statistical procedures, and qualitative anddisaggregated methods, which require a more subjective evaluation.


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Copom attempts to analyze the reasons for the differences between the inflation projection and the target, inorder to react according to best international theory and practice. In order to react appropriately, it is necessaryto distinguish between demand and supply shocks, and between temporary and permanent shocks.

In order for the Central Bank to be able to act with the necessary flexibility, without jeopardizing thecredibility of its commitment to the targets, it is essential that its performance be totally transparent, so that anappropriate decision is not interpreted as an unjustified deviation form its stated goals.

The inflation-targeting regime chosen by Brazil is showing small signs of success in the areas of reducedannualized inflation, increased GDP growth, and lowered interest rates. This however is not noticeable to thepublic who are still concerned with what they see as inflated interest rates.

Debt Management:

The Banco Central do Brasil (BCB), is an autonomous federal institution and part of the National Financial

System.Before the creation of the Central Bank, the Brazilian monetary authorities were the Currency andCredit Superintendence(SUMOC), the Bank of Brazil (BB) and the National Treasury.

The SUMOC, created in 1945 with the objective of exercising the monetary control and preparing the basis for acentral bank, had the responsibility of setting forth the: reserve requirements ratio for commercial banks,discount rates (linked to development funds) and financial assistance for liquidity (meaning the discount as aclassic instrument of monetary policy), as well as the interest rate on bank demand deposits. At the same time, itsupervised the operation of commercial banks; managed the exchange policy and represented the Country atinternational organizations.Banco do Brasil carried out the functions of the government bank: controllingforeign trade operations; executing foreign exchange operations on behalf of public sector enterprises and theNational Treasury; executed the rules set forth by the SUMOC and the Bank for Agricultural, Industrial andCommercial Credit, as well as receiving reserve requirements and voluntary deposits of commercial banks.The

National Treasury was the currency issuing authority, but the issuing process was a complex one involvingseveral governmental entities.Although some improvement has been reached, the institutional process was not complete. The Central Bankbecame the currency issuing bank, but acted according to the needs of the Bank of Brazil. It was also the bank ofbanks, but was not the sole holder of the financial institutions' deposits because the institutions placed theirvoluntary reserves in the Bank of Brazil. Besides, the Central Bank was the government's financial agent, incharge of managing the federal public debt, but was not the cashier to the National Treasury, since this was afunction of the Banco do Brasil.

In 1985, the decision was made towards a financial reorganization of the government, with a breaking down ofthe accounts and functions of the Central Bank, the Bank of Brazil and the National Treasury. In the 1986 fiscalbudget, not only all the revenues and expenditures of the National Treasury were included, but also all theaccounts of fiscal nature that were under the Monetary Budget. In 1986, the "movement provisional account"was extinguished and, from then on, the disbursement of funds from the Central Bank to the Bank of Brazilwere clearly identified in the budgets of each institution, eliminating the automatic transfers that hampered themanagement by the Central Bank.In a process that continued through 1988, the functions of monetary authority were progressively transferredfrom the Bank of Brazil to the Central Bank, while the atypical activities carried out by the latter, such as thoserelated to economic incentives and the administration of the federal public debt, were transferred to the NationalTreasury.The 1988 Constitution sets down Central Bank's matters, such as the exclusive attribution of the Union to issuemoney, the need to submit persons appointed by the President of the Republic to be president and director of theCentral Bank to prior approval by the Senate, and the prohibition to direct or indirect granting of loans to the

National Treasury. The 1988 Constitution also establishes the drawing up of a Complementary Law of the


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National Financial System, to substitute Law no. 4,595, dealing with varied and important aspects of thestructure and activities of the Banco Central do Brasil.

Hence was formed the Brazilian National Treasury which is currently the larges security issuer in the country.

BRAZIL's DEBT MANAGEMENT STRATEGY

In 1994-98, Brazil's domestic debt grew very rapidly while remaining short in maturity. The main policyrecommendations for managing this domestic debt situation: maintain a tighter fiscal stance and consider the useof inflation-linked bonds.

Brazil's domestic debt has posed two challenges to policymakers: it has grown very fast and, despite progress,remains extremely short in maturity.

Bevilaqua and Garcia analyze Brazil's experience with domestic public debt management, searching for policyprescriptions for the next few years.

After briefly reviewing the recent history of the country's domestic debt, they decompose the large rise infederal bonded debt in 1995-98, searching for its macroeconomic causes. The main explanations: extremelyhigh interest payments (caused by Brazil's weak fiscal stance and quasi-fixed exchange rate regime) and theaccumulation of assets (especially obligations of Brazil's states).

Simulations of the net debt path for the near future underscore the importance of a tighter fiscal stance toprevent the debt-to-GDP ratio from growing further.

The main policy advice is to foster and rely more on inflation - linked bonds - the least harmful way to lengthendebt maturity.The following policy measures were taken:1.Refinancing risk at safe levels;

2.Gradual reduction of market risks:3.Short term interest rates; exchange rate; Increasing share of fixed-rate instruments4.Consolidation of the domestic yield curve:5.fixed-rate: firm bid offer for long-term securities; regular auction for indexed bonds;6.Standardization of debt instruments: Domestic exchange-offers; fungible instruments;7.SLM Framework

The new Brazilian Payment System had the following objectives: Reduce systemic risk; Central Bank no longer bearing the risk; Increase settlement efficiency; Enhance secondary market liquidity for debt instruments; Incentive to more competitive financial services; and Potential increase of domestic credit supply.

In 1994, a Brady deal restructured Brazils debt to private creditors and helped Brazil return to internationalfinancial markets. At the same time, a stabilization program (the Real Plan) successfully ended hyperinflation.

Although Brazil has not experienced an open debt crisis in recent years, concerns about thesustainability of Brazilian debt continue to attract attention, as witnessed most recently during the run-up to the 2002 presidential elections. Concerns about debt sustainability in Brazil are at least partlylinked to the fact that Brazils debt service indicators are among the worst for emerging markets.According to World Bank statistics (GDF 2004), Brazils debt-to-exports ratio was over 300 percent in2002 and Brazils debt service ratio was 68.9 percent.

Gross public debt, according to the Central Bank, stood at 79 percent of GDP in 2003, having grownfrom 65 percent of GDP since 2000. In net terms - the commonly used debt concept in Brazil - public


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debt, stood at 59 percent of GDP at the end of 2003 (see Figure 2-1). Public debt grew by nearly 30percentage points from 30 percent of GDP at the end of 1994 to close to 60 percent at the end of 2003.

The fastest debt accumulation occurred during 1998 and 2000, when debt increased by nearly 10 percentage points. Brazil external debt burden is largely private. Less than half of the countrysexternal obligations are public or publicly guaranteed and public external debt has followed a rather flatpath over the last decade. Public external debt accounts for about 20 percent of GDP.

The Interest payments on external debt (% of GNI) in Brazil were reported at 1.00 in 2008. It was 2.6%in 2000. The Central government debt; total (% of GDP) in Brazil was reported at 60.88 in 2008,according to the World Bank. Debt is the entire stock of direct government fixed-term contractualobligations to others outstanding on a particular date. It includes domestic and foreign liabilities suchas currency and money deposits, securities other than shares, and loans. It is the gross amount ofgovernment liabilities reduced by the amount of equity and financial derivatives held by thegovernment.

The debt has been increasing gradually since 2007 and has reached a level of 320Billion$ in 2011.

Regulatory Policies:

Brazil has a the legal system based on a 'civil code', rather than on a common law basis. In general terms, in acivil code environment, most of the principles and norms are established in the constitution and other supportingregulations and the judicial courts have to interpret the law on a case-by-case basis. In countries with a commonlaw practice, the decisions are usually based on precedents and similarities with other legal cases.

Because of Brazil's civil code system, the courts do not necessarily have to follow the same decision taken onprevious similar cases and the judges have the freedom to take decisions based on their interpretation of thecodes regarding the specific case being tried, even if the decision is contrary to previous decisions on similarcases.

You can imagine the amount of time and uncertainty that this system brings to overall society, especially tobusinesses and corporate contracts, transactions, etc. Judicial claims in Brazil sometimes take more than 10years to be resolved in courts and the outcomes are normally unpredictable. This regulatory environment alsohas important impacts on tax and labour rules, which in turn have a tremendous effect on businesses andcorporate relationships.

Brazil is doing very well in the area of foreign direct investment. The country is opening itself up to new ways

of doing business. Cash flow in, out, and across the country is getting easier, and many sectors have alreadybeen or are being privatized by the government.


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Privatization has had a huge impact in certain industries and segments, such as telecommunications, power andbanking in particular. This all happened in the 1990s. If we look at the level of foreign direct investment prior tothe 1990s, it was around $1bn a year. In 2000 it was about $33bn. It has been a huge attraction for foreigninvestors.

After 9/11, there was a dip in foreign investment worldwide, and that obviously affected Brazil. In the past few

years, however, they have seen it coming back. Foreign direct investment in 2004 amounted to $13bn and isexpected to grow to $17bn in 2005.

The greatest asset for foreign investors, we would say, is the potential for market growth combined with thealready existing industrial base of most areas of Brazil. The potential for growth for investors is tremendous. Ifwe look at the ratio of automobiles to people regardless of the income gap between rich and poor, there isenormous room for growth. Of course we now compete with other developing countries for investment,especially China, Russia and India, and this competition was almost non-existent in the 1990s.

Most likely, investors can expect their investments to grow in Brazil at a faster pace than they would grow inmost developed countries. That's from the investors' perspective. From the Brazilian consumer's perspective, themore producers and suppliers we have, the more competitive market and prices for local consumers. In

summary, foreign investment is good for everyone.

The Time required to obtain an operating license (days) in Brazil was 83.45 in 2009, according to a World Bankreport, published in 2010. Time required to obtain operating license is the average wait to obtain an operatinglicense from the day the establishment applied for it to the day it was granted.

The Total tax rate (% of profit) in Brazil was last reported at 69.00 in 2010, 69.20 in 2009 and 69.2 in 2008Total tax rate is the total amount of taxes payable by businesses (except for labour taxes) after accounting fordeductions and exemptions as a percentage of profit.

The Time required to register property (days) in Brazil was last reported at 42.00 in 2010, according to a WorldBank report released in 2011. Time required to register property is the number of calendar days needed for

businesses to secure rights to property.

The Time required to enforce a contract (days) in Brazil was last reported at 616.00 in 2010, 2009 and 2008.Time required to enforce a contract is the number of calendar days from the filing of the lawsuit in court untilthe final determination and, in appropriate cases, payment.

Role of Brazil government in internal sectors:

Health:SUS (Public) spending as a share of GDP: 3.1%

Health care spending as a share of GDP: 8%Share of health care spending that is privately funded: 60%Life expectancy at birth: 72.5 yearsInfant Mortality Rate: 21.17 deaths per 1000 live birthsNumber of beds per 1,000 (global average): 2.4 (4.3)Physicians per 10,000 (global average): 16.9 (23.4)Brazils Population: 203.4 million

System of health care: Brazil has a public system of medical coverage guaranteed by the Brazilian Constitutioncalled the Sistema nico de Sade (SUS) that was created in 1989 from the merger of two state systems, one forthose in formal work and the other for everyone else, it is exceptional in Latin America, which by and largecontinues with the two-tier public system Brazil abandoned. The 1988 constitution declared health care to be the

right of the citizen and its provision the duty of the state.The SUS mission:


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1) All citizens should have access to health care.2) All citizens are entitled to full and complete health care.3) All health care policies should aim toward the reduction of inequality between individuals.But there is a gap between the aspirations of SUS and the reality. Funding is an inadequate hotch-potch, part-state, part-federal, and varies wildly from place to place. More than two-thirds of ICESPs budget of 350m reais($225m) comes from So Paulos state government. Few other states are rich enough to provide such generoustop-ups. SUSs family doctors reach only one Brazilian in two. Another quarter have private-health insurance;the remainder, mostly poor people, live in remote rural areas or violent urban slums where the service is lacking.Bigger improvements, though, require changes to the way SUSs budget is spent.Unless Brazil enjoys significant and sustainable economic growth for the next 20 years, by 2025 the countrywill have to allocate around 12 percent of its GDP to health care just to maintain the current levels of service.

Defence:Military expenditure: is around 6% of govt. expenditure in last 5 years whereas earlier it used to be 27.3 %. As a% of GDP it is noted 1.94% in 2009.Since the end of military rule in 1985, the armed services have steadfastly supported Brazil's civilian leadershipand adapted to their new apolitical status. Brazil's military has subordinated itself to civilian rule, under a

civilian Ministry of Defense. The officer corps is professional and dedicated to defending Brazil's constitution.Data on Brazil's military expenditures need to be approached with caution. Their accuracy is complicated byhigh rates of inflation since the late 1950s, by secrecy surrounding the funding of various military-relatedprojects, by personnel costs that are sometimes hidden in other budgets, and by the common practice of mixingthe accounts of the national treasury, the Central Bank, and the Bank of Brazil (Banco do Brasil--BB). However,even if the figures generally attributed to Brazilian defense expenditures understate their true value, there isconsensus that Brazil is among the countries with the lowest levels of military expenditures, and that thoselevels have declined in the last three decades. Military budgets decreased steadily for 15 years, with the severestcuts introduced over the four years 2000-2004. Brazil's low level of military expenditures can be attributed tothe perception that the country has few external threats and to Brazil's large size in relation to its neighbors. Interms of threats, the deepening integration process with Argentina since the early 1980s virtually has removedthe only potential external threat to Brazil. Despite its low rate of military expenditures, in absolute terms Brazil

is by far the largest military power in Latin America.

Infrastructure:Roads are the primary method of transportation in Brazil of both passengers and freight. With an estimated21.31 million passenger cars and 5.5 million commercial vehicles in 1998, the highway system is inadequateand poorly maintained. There are approximately 1.98 million kilometers (1.23 million miles) of highways inBrazil, but only 184,140 kilometers (114,425 miles) of these roads were paved in 1996. A study by the WorldBank shows that in the early 1990s 28 percent of the country's highways were in poor condition. Furthermore,the lack of proper maintenance increased transportation costs in Brazil by nearly 15 percent over the sameperiod. The government implemented road construction plans in order to integrate the industrialized south withthe less developed northeastern and northern areas. This integration enabled agricultural producers to movegoods to ports located in the coastal areas for exportation. The railway system in Brazil is very limited. Thereare only 27,882 kilometers (17,326 miles) of tracks in Brazil (excluding urban commuter lines) and this numberis in decline as track falls out of service.In contrast, Brazil's air transportation is well developed with 48 mainairports, 21 of which are international. In 1998 about 31 million passengers used Brazilian airlines, traveling atotal of 27.39 million kilometers (17.02 million miles). The total weight of airline freight was equal to 602.74million metric tons and Brazilian airlines carried freight over 2.2 billion kilometers (1.36 billion miles).Guarulhos International Airport at So Paulo and Galeo International Airport at Rio de Janeiro are the mostimportant and active international airports of Brazil.Hydroelectric plants generate most of Brazil's electricalpower, responsible for 91 percent of the total production. Secondary sources include fossil fuels and nuclearenergy.The upcoming World Cup of 2014, and Olympic Games of 2016, present opportunities for Brazil to benefitfrom tourism and prove to the world that it is ready to take its place as an important piece of global governance.

The country sits under the worlds eyeglass, as everyone anxiously waits to see how it will address its famousinfrastructure problems in time to deliver world-class spectacles. The National Brazilian Development Bank


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(BNDES) continues to invest heavily in the market, providing almost R$274 billion for the period of 2010 2013 (up 38% from 2005 2008). Nevertheless, the country must continue to seek new ways to attract privatecapital, by revisiting institutional and regulatory frameworks, in order to have the necessary investment levelsthat will sustain the growing economy and allow the delivery of successful projects.

Import and Export:

At the end of the 80s there was the building up of a consensus to promote some kind of trade liberalizationprocess. Moreover, it was becoming clear that protectionist policies would jeopardize Brazil export marketaccess in developed countries the decade of the 80s was marked by various commercial contends with theUnited States , the need to expand exports require that Brazil was aligned with the demands of theinternational regulations. So, The first broad tariff reform was introduced in 1990 which listed more than 1,200import products that had either been prohibited or had their import license suspended were eliminated. Theintention was to make the protection system more transparent making the legal tariff close to the one actuallylevied on account of the existence of a tariff immunity system contained in the special import regimes. At theturn of the 1990s, the Brazilian government along with the governments of Argentina, Paraguay and Uruguayformalized an agreement forming a Common Market of the South: Mercosur. In March of 1991, they signed theTreaty of Asuncion, establishing the formation of the common market. During 1991 and 1994, the tariffs on

intra-regional trade were linearly reduced and a common external tariff (CET) was negotiated. On January 1995,the Custom Union of Mercosur entered into force, encompassing around 85% of the tariff lines.

In present scenario, Trade liberalization in Brazil has resulted in a shift toward more pollution intensive exportsin manufacturing. This poses a grave challenge. Brazil vitally needs growth in exports to support itsdevelopment goals, but increases in exports are resulting in corresponding levels of pollution that arejeopardizing such development goals. It is essential that Brazil design a series of environmental measures thatwill increase economic growth and enable environmental protection at the same time. Our analysis of the futurecosts of environmental protection implies that Brazilian exports will not be significantly affected byenvironmental mitigation in all but a few sectors. The careful use and design of flexible economic instrumentsfor environmental improvement would be an important first step in the right direction.

Primary Partners for Exports and Imports: U.S., China, Argentina, Germany etc.

Brazil Imports:


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It was virtually impossible to find imported products in Brazil before 1990. The Brazilian government made useof protectionist measures and extremely high taxes to discourage importing of goods. This picture howeverchanged when ex-president Fernando Collor de Mello broke the importing barrier by reducing the averageimporting taxes and abolishing many limiting quotes. Although it became easier to import products, there arestill other challenges that companies will face when bringing their goods into Brazil. Besides of meeting

prohibitions on the import of certain items such as used clothings, cars and machinery, importers have to dealwith complex cascading taxes and charges that increase significantly the cost of importing products into thecountry. In most cases taxes (both federal and state) and other charges will add about 100% to the importingcost, depending on what type of product and which state is the final destination for the import.

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil 48.7 55.8 57.7 46.2 48.25 61 78.02 91.4 173.1 127.7 187.7
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Import as a % of GDP

Brazil mainly imports machinery equipments, electrical equipment, transport equipment and oil.Imports of Goods and Services: The Imports of goods and services (annual % growth) in Brazil was reportedat 18.49 in 2008, according to the World Bank. Imports of goods and services represent the value of all goodsand other market services received from the rest of the world. They include the value of merchandise, freight,

insurance, transport, travel, royalties, license fees, and other services, such as communication, construction,financial, information, business, personal, and government services.Fuel Imports: The Fuel imports (% of merchandise imports) in Brazil was reported at 19.82 in 2008 which wasmore than 50% in 1980 and 15% in 2000. In 1980, Brazil imported 77 percent of its oil. Among those decisionswas to stop depending on foreign energy sources. Since 1980, Brazil has increased its oil production by 876percent. Now it actually has a surplus. Brazil has a highly developed technology to extracting fossil fuels.Which guarantees it a great production that would supply all the internal demand and also be able to exportsome petrol. And it has become completely self-sufficient in oil. But still, Brazil imports oil due to the densityof the national one. The imported oil is mixed to the national so it's proper to be sold and used.The Food imports (% of merchandise imports) in Brazil was reported at 4.37 in 2008 and it was 9.8% in 1980The Manufactures imports (% of merchandise imports) in Brazil was reported at 70.22 in 2008 and it hasraised from 40% approx in 1980.

The Agricultural raw materials imports (% of merchandise imports) in Brazil was reported at 1.22 in 2008, ithas decreased from 3.6% in 1990.

Brazil Exports:


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In 2005, Brazil's total exports more than doubled to US$118 billion from $58 billion for 2001. Over that sameperiod, imports into South America's largest country grew some 30% to $74 billion from $56 billion. Brazil'strade surplus has expanded more than 16-times to $47 billion from $2.6 billion over the past 4 years.Brazil is the world's leading exporter of sugar, coffee, beef and orange juice. Soybeans are Brazil's fastest-growing shipments, powered by the appetites of China's 1.3 billion consumers. Other major exports includeaircraft, vehicles, iron ore, steel, textiles and footwear.

Export as a % of GDP

The Exports of goods and services (annual % growth) in Brazil was -0.60 in 2008. The Exports of goods andservices (% of GDP) in Brazil was 14.34 in 2008.

The Fuel exports (% of merchandise exports) in Brazil was 9.46 in 2008, In 2000 it was around 1.8%.The Food exports (% of merchandise exports) in Brazil was 27.58 in 2008 it has decreased since 1970s, thattime it was 70% of merchandising exports.The Manufactures export (% of merchandise exports) in Brazil was 44.85 in 2008.The Agricultural raw materials export (% of merchandise exports) in Brazil was 3.53 in 2008. It has notcrossed 6% since 1975.The High-technology export (% of manufactured exports) in Brazil was 11.97 in 2008.

Factors That May Increase Exports:

Brazil is using only 1/3 of potential arable land. They have availability of land, water, and labor to increase cropand meat production. The current agricultural area is 62 million hectares. The potential for expansion is threetimes this amount. Rising incomes around the world contribute as well.

Factors That May Decrease Exports:

Important markets in the North America Free Trade Agreement and in East Asia are blocked to Brazil becauseof sanitary and phytosanitary restrictions. Examples: foot-and-mouth disease, Exotic Newcastle Disease, andfungicide contamination in soybeans.

The Future of Brazils Exports:

The result of Brazils efforts to improve sanitary conditions will determine the future increases in meat exportsand greater access to the global market.

Country 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Brazil 46.9 55.1 57.8 59.4 73.28 95 115.1 137.5 197.9 153 199.7
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There is an increasing demand for raw materials for bio fuels. Domestic food consumption is also rising. Thiscould reduce exportable surpluses.

Trade Partnerships

USA

The United States and Brazil have enjoyed generally close relations for 200 years. The two countries currentlycooperate on trade issues, HIV/AIDS efforts, regional concerns, and the international peacekeeping operation inHaiti. Presidents Bush and Lula signed an agreement to promote and increase the worldwide trade in ethanol.Brazil and the United States are the top global ethanol producers. The two countries have worked closely onefforts to control narcotics production and distribution across Latin America. Brazil and the United Statescooperated in principle on the creation of a Free Trade Area of the Americas (FTAA) but negotiations falteredover the issue of agricultural subsidies.

Under the memorandum of understanding signed in 2007, Brazil and the U.S. have worked together to advancebiofuels cooperation, both bilaterally and globally.

Argentina

ArgentinaBrazil relations are both close and historical, and encompasses all possible dimensions: economy,

trade, culture, education and tourism. Argentina is the main destination for Brazilian investment in LatinAmerica. Brazilian investments in Argentina are mostly in oil, cement, mining, steel, textiles, cosmetics, banks,food, and beverages. According to the United Nations Economic Commission for Latin America and theCaribbean, forty percent of direct investment in Argentina comes from Brazil.

Brazil accounts for Argentina's largest export and import market, while Argentina accounts for Brazil's thirdlargest export and import market. Total trade between the two countries amounted to the sum of US$32.9billion in 2010.

2009 2010

Argentine exports to Brazil

$11.3 billion $14.4 billion

Brazilian exports to Argentina$12.8 billion $18.5 billion

Total trade $24.1 billion $32.9 billion

India

The two countries share similar perceptions on issues of interest to developing countries and have cooperated inthe multilateral level on issues such as international trade and development, environment, reform of the UN andthe UNSC expansion.In recent years, relations between Brazil and India have grown considerably and co-

operation between the two countries has been extended to such diverse areas as science and technology,pharmaceuticals and space. The two-way trade in 2007 nearly tripled to US$ 3.12 billion from US$ 1.2 billionin 2004.The trade is expected to to cross $ 10 billion mark by 2012 as many companies in both the nations areexploring the possibilities of forming joint ventures. The Brazilian companies have invested close to $600million in India so far, while the firms from India made an investment to the tune of USD 1.5 billion in Brazil.Among the major Brazilian investments in India so far is the joint venture-Tata-Marcopolo, between TataMotors and Marcopolo of Brazil.Global software giant, Wipro Technologies, also set up abusiness processoutsourcing centre in Curitiba to provide shared services to AmBev, the largest brewery in Latin America

Trends of FDI:

The Foreign Capital and Exchange Department (Decec) of the Brazilian Central Bank (Bacen) is responsible forthe registration, supervision and follow-up of foreign direct investment (FDI) in Brazil.
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Foreign direct investment, net inflows (BoP, current US$)

FDI began to gain importance in Brazil in the late 19th century, especially through British investments inservices directly related to exports activities such as railroad and sea transportation, financial services andcommercialization. Foreign investments in urban infrastructure services (transportation, energy, and so on)gained strength in the first decades of the 20th century, driven by growing urbanization and industrialization.

Later on, provision of a great deal of public services was taken over by the State, through a unilateral decisionof governments or negotiations with the foreign investors.

Over the last few decades, foreign direct investments (FDI) have played a very relevant role in Brazilianindustrialization, attracted especially by the large domestic market but also by government policies anddirected preferentially towards capital and technology-intensive industrial (and more recently services) sectors.The FDI regime in Brazil has been fairly liberal during this period and foreign capital is viewed with sympathyby the large majority of political currents and parties, who see it as a source of employment and modernizationof the economy.

The FDI share of the countrys investments, production and foreign trade grew over the last decade, whichended with a debate on the FDI contribution to development and on the costs and benefits of the growing weight

of transnational companies (TNCs) in the economy. One element missing from this debate, however, is thedimension of environmentally and socially sustainable development, which only lately has become the focus ofsome attention.

Example: Telecommunication sector attracted the largest amount of FDI between 1998 and 2001 and brought toBrazil various international players (new comers investors).

FDI in Brazil jumped four times since 2005 totalling 661bn .Even with the exclusion of inter-company loansand transfers estimated by the central bank at 80.9 billion, FDI rose by 256% over the period. The leadingforeign investors in Latin Americas biggest economy are the United States, with 104.7 billion; Spain, 85.3billion; and Belgium, with 50.4 billion. Just over 98 billion, or 16.9% of total FDI during the six year period,went to Brazils financial sector, while 9% 52.2 billion was captured by the beverage industry. The oil andgas sector received 49.5 billion in FDI, 8.5% and 40.6 billion flowed into telecoms.

International Linkages:

Brazil is an active participant in the multilateral systems of rules regulating the action of national states in theeconomic, trade and political fields (the World Trade Organization, United Nations, the Missile TechnologyControl Regime, the mechanisms for nuclear non-proliferation) and in regional integration by means of itspresence within Mercosul.

Brazil is a country with global interests, having a diplomatic presence across all continents and a style ofdiplomacy that aims at promoting efforts towards stabilization, opening up and providing better access for

Brazil to foreign markets, productive investment and the technologies that are indispensable to the nation'sdevelopment. Brazil plays an active and increasing role in international debate on all the major items on the


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contemporary world agenda: defending democracy, promoting sustainable development, protecting andpromoting human rights, combating drug trafficking and organized crime, commitments in relation to the non-proliferation of weapons of mass destruction, economic integration and the universalization of non-discriminatory rules governing international trade and the transfer of technology.

Brazil's foreign policy is a by-product of the country's unique position as a regional powerin Latin America, a

leader among developing countries, and an emerging world power. Brazilian foreign policy has generally beenbased on the principles ofmultilateralism, peaceful dispute settlement, and non-intervention in the affairs ofother countries

Brazil's political, business, and military ventures are complemented by the country's trade policy.

Brazil has traditionally been a leader in the inter-American community. It has played an important role incollective security efforts, as well as in economic cooperation in the Western Hemisphere. Brazil is a chartermember of the United Nations and participates in its specialized agencies. In 2010-2011, Brazil served as a non-permanent member of the UN Security Council. Prior to this, it had been a member of the UN Security Councilnine times. Brazil is seeking a permanent position on the Council. Brazil was a leader of the G-20 group ofnations and in 2009 became a creditor country to the International Monetary Fund (IMF). The U.S., WesternEurope, and Japan are primary markets for Brazilian exports and sources of foreign lending and investment.

China is a growing market for Brazilian exports.

Political Stability :

The National Congress of Brazil is the legislative body ofBrazil's federal government. The Congress isbicameral, composed of the Federal Senate (the upper house) and the Chamber of Deputies (the lower house).

The 1988 constitution grants broad powers to the federal government, made up of executive, legislative, andjudicial branches. The president holds office for 4 years, with the right to re-election for an additional 4-yearterm, and appoints the cabinet.

Fifteen political parties are represented in Congress. Party-switching is a long-running theme in Brazilian partypolitics, So ,the proportion of congressional seats held by particular parties changes regularly. During thelegislatures (1986-1990, 1990-1994), more than 30% of deputies changed their party affiliation, some more thanonce.

President Luiz Incio Lula da Silva ( who took office on January 1, 2003) has been credited with implementingpolicies that promoted upward social mobility by addressing inequality and raising living standards. Since, thecountry dramatically reduced the jobless rate from a historic high of more than 13 percent that year to 6.7percent in September.In 2010, the economy generated two million jobs, compared to 600,000 in 2003.Thepolitical economy that has evolved since 1994 across two two-term presidential administrations has made itpossible for Brazil to re-position itself in the global arena. Given this foundation, presidents began to projectBrazil beyond its borders.

Lula has been cricized for failing to acknowledge the role of the rise in international commodity prices intransforming the economy. Cheaper and efficient transportation is a need of the economy along alternative ways

of transportation.While Brazil is second only to China in terms of attracting foreign investment, economicgrowth is hindered by interest rates that are among the highest in the world. An overvalued currency is hurtingBrazilian exports and pushing up domestic prices. A Big Mac now costs aroung $6.16, compared with $1.50when Lula took office with respect to US which has big mac index of 4$, which means that the currency hasbecome overvalued . Hence ,Domestic goods will be more expensive relative to Foreign goods The country getslow marks on crucial issues like corruption and must address gaps in healthcare, education and infrastructure.Education is one area that the business sector says must be improved. Although the percentage of children nowattending school has risen steadily in the past 20 years, there is widespread agreement that the lack of goodeducation is hampering Brazils industrial and overall development.Although Lula announced a $500 billioninfrastructure spending plan at the beginning of his second term in 2007, less than half of the projects have beencarried out.Brazil is good in terms of getting organized but not good in execution .The country boasts a growingnumber of highly successful companies, including the state-run oil company, which recently completed thelargest secondary stock offering on world record. With massive oil reserves far beneath the ocean floor, Brazil is
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also at the forefront of energy development. Those oil reserves, could help vault Brazil into developed-nationstatus if the proceeds are managed cautiously

Brazil is struggling with an image of corruption that is aggravated by frequent scandals involving high-levelpoliticians and bureaucrats. Political scandals concerning money laundering and manipulation of largegovernment contracts have continued to surface, discouragement public trust in the political system. President

Lula da Silva himself has struggled to keep clear of several corruption scandals, while there have beeninvestigations and convictions of some of his closest political allies.High levels of political corruption are citedas a driving force behind growing public distrust towards the political system, which is aggravated by poorpublic services and the fact that economic inequality in Brazil remains pervasive despite high taxes andrelatively strong economic growth. Corruption scandals have stalled the President's efforts to push throughimportant legislation and key reforms.

Brazil's challenge of abundance looms greatest in the oil sector. The government wants more control overresources and has very little desire to allow the international community to profit from the exploitation of thecountry's vast new oil frontier

The heart of the new political economy consists of a political consensus supporting a macroeconomic policy thatprioritizes fiscal discipline, inflation-targeting and a floating exchange rate. Defending the independence of the

Central Bank is a key institutional component. Other elements of the economic policy include deepeningBrazils participation in global trade, to take advantage of a favorable external environment, and building upsurpluses that allow Brazil to pay down its dollar denominated debt, thereby reducing vulnerability to externalshocks like the 2008-09 global financial crisis. On the social side, measures to reduce socio-economicinequalities have increased employment opportunities most importantly in the formal sector and expandedconsumer buying power.

Poverty:

Brazil is one of the most unequal nations in the world, although it is one of the wealthiest. According to theUnited Nations Development Program (UNDP), income inequalities as measured by the GINI index2, arehigher only than those of some very poor African countries such as Sierra Leone, Swaziland, Lesotho or

Namibia. However, the World Bank ranks the Brazilian economy among the 10 richest in the world, with aGross Domestic Product (GDP) of $1.7 trillion PPP3, similar to the Italian GDP. Considering that the countryhas a population of 187 million, its per capita GDP is in the order of $ 9,000 PPP.

Facts and Figures:

Income share held 20% in Brazil is reported as 19.62% in 2008 and is continuously in 19 % from last10 yrs.

Income share held by lowest 20% in Brazil is 3.02% in 2008, increased from 2.45 in 2001. Income share held by highest 20% in Brazil is 58.73% in 2008 and has decreased from 62% in 2000. Percentage of poverty in urban population in Brazil is 17.5% in 2005 Percentage of poverty in rural population in Brazil was reported as 41% in 2005 and 51.4% in in 2000.

Poverty headcount ratio at national poverty line (% of population): it was 21.94% in 2009.


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Average spending by a below poverty line person is 1.25 $ a day (PPP). Approximately 40 million Brazilians have been able to step out of poverty and join the middle classes

over the past decade The government has succeeded in halving the incidence of rural poverty in the past two decades, but

extreme poverty remains a persistent concern in rural areas. About 5 per cent of the urban population is classified as extremely poor, compared to an estimated 25

per cent of the rural population. About 40 per cent of poor rural households are made up of smallholder farmers relying on their

produce for their livelihoods, and 46 per cent are landless, unemployed laborers.

Causes: One of the main causes of poverty throughout Brazil, and in the northeast in particular, is extreme

inequality of land tenure. Good agricultural land is concentrated in the hands of a few. But smallholder farmers make up more than 84 per cent of the countrys farming sector, employing

approximately 75 per cent of the rural labor force. Overall, rural communities are held back by high levels of illiteracy due to poor quality and coverage

of schooling, limited access to basic infrastructure and services, and poorly functioning rural financial

markets. They lack access to water, particularly in the arid interior of the northeast, credit, skillstraining and improved technologies that would help boost productivity.

Government initiatives: Reducing rural poverty and social inequality is a major priority for the Government of Brazil. In June

2011, the government launched an ambitious new plan, the Plano Brasil Sem Misria (Brazil WithoutPoverty), which aims to eradicate extreme poverty over the next three years. The three main thrusts ofthe plan focus on:

a) raising family incomes and ensuring that social benefits reach all households in needb) increasing access to public servicesc) increasing access to employment and income-generating opportunities The plan will extend already existing health, education, job training and cash-transfer programmes to

over 16 million people living in severe poverty. Specific activities in rural areas will help increase productivity, employment and income generation

through improved access to means of production, technical assistance and markets. The plan will also help small farmers by fixing food prices and increasing the flow of development aid

to the most marginalized areas. New policies and programmes have been introduced to make land available to poor landless people Government also is supporting family farms through the National Program for Strengthening Family

Farming, a large umbrella program offering subsidized farm credit, assistance for small agro-industries,crop insurance, and support for rural infrastructure, extension and training

In the past decade, Brazil has lifted 25 million people out of poverty, thanks to macroeconomicstability, high commodities prices, and a much hailed social program called Bolsa Familia that givesfamilies monthly cash for families that adhere to conditions such as keeping kids in classrooms

Now Brazil has launched another multibillion-dollar antipoverty plan, called Brazil Without Misery, toreach the remaining 16 million Brazilians still living in extreme poverty. Expanding upon BolsaFamilia, it will increase cash transfers, improve public services, and create new job opportunities forthe poor

Conclusion: Brazil may achieve social indicators similar to those ofdeveloped countries by 2016 if the country is

able to maintain the same rate of reduction ofextreme poverty and income inequality as recorded overthe 2003 to 2008 period. Besides the increase in the minimum wage, which today is about $200 amonth, there was a relative decrease in the prices of food, resulting in a reduction in extreme povertyand food insecurity indices

Studies carried out by Hoffmann (2005) and IPEA (2007) reveal the important role played by cashtransfer policies in reducing poverty and social inequalities in Brazil.
http://www.csmonitor.com/tags/topic/Brazilhttp://en.wikipedia.org/wiki/Social_indicatorhttp://en.wikipedia.org/wiki/Developed_countrieshttp://en.wikipedia.org/wiki/Extreme_povertyhttp://en.wikipedia.org/wiki/Income_inequalityhttp://www.csmonitor.com/tags/topic/Brazilhttp://en.wikipedia.org/wiki/Social_indicatorhttp://en.wikipedia.org/wiki/Developed_countrieshttp://en.wikipedia.org/wiki/Extreme_povertyhttp://en.wikipedia.org/wiki/Income_inequality


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Greater efficiency of the public apparatus, which contributed to increasing the tax revenue and also toinspection activities for the purpose of fighting slave labor, child labor and raising levels of regulationin the labor market and, consequently, the social protection available to workers.

Unemployment:

The unemployment rate is a significant welfare indicator within a society. In economic terms, the existenceof workers capable of contributing to the generation of value in the economy, willing to work, althoughunable to find jobs, represents a waste of productive resources.

Facts and figures:

Current Brazil unemployment rate is 5.8%. It has come down from 9.3% in 2001. Employment in agriculture (% of total employment) in Brazil was 28.6% in 1985 and 19.3% in 2006.

Employment in industry (% of total employment) in Brazil it was reported AS 21.4% in 2006 and22.1% in 1985.

Employment in services (% of total employment) in Brazil it was reported as 49.3 % in 1985 and59.1% in 2006.

The Employment to population ratio; 15+; total (%) in Brazil was reported at 63.90 in 2008 The Employment to population ratio; 15+; male (%) in Brazil was reported at 75.80 in 2008 The Employment to population ratio; 15+; female (%) in Brazil was reported at 52.80 in 2008

Rate of unemployment:

Over the last years and until September 2008, Brazil witnessed a rather sound macroeconomicenvironment.

Along with stable prices, the GDP and investment growth both increased. This positive performancewas mirrored by the labor market behavior, with a marked reduction in the unemployment rate.

Between 2003 and 2008, there was a significant drop of 4.4 percentage points in the unemploymentrate

Causes:

The period of higher economy growth for Brazil was also a highly dynamic for the whole world. Theworld saw huge growth (Exports/investments grew) in GDP especially BRIC nations

Since late 2007 the world economy has been on decline due to the financial crisis brought about by theUS subprime market (mortgages). This crisis only hit the Brazilian labor market in the second half of2008.


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Government initiatives:

Unemployment insurance: Brazils unemployment insurance program, (most extensive in LatinAmerica) available to only about 35 percent of workers, primarily because it covers only wageworkers in the formal sector. The program provides benefits for three to five months to registeredworkers who meet minimum contribution requirements.

Public Employment Service: The Brazilian public employment service, Sistema Nacional de Emprego(SINE), was created in 1975 to provide guidance to unemployed workers, improve information on thelabor market, and aid in the design and development of labor market policies. The sharp increase inunemployment in the 1990s led to the creation of additional training and certification programs and anincrease in the number of branches. The number of workers registered at SINE has surpassed 5 millionannually since 2002.

Training programs: The 1995 National Plan for Professional Formation (PLANFOR) sought to increaselabor productivity and set the goal of training 20 percent of the countrys economically active

population. The program was implemented through state governments and social entities without theinvolvement of SINE. Eleven million workers were trained between 1990 and 2001; In 2003,PLANFOR was replaced by the National Qualification Plan (known as PNQ), which establishedspecific pedagogic content and increased the hours of training.

Microcredit programs: The Program for the Creation of Employment and Income (PROGER) wasestablished in 1994 for the purpose of extending credit to microenterprises and small enterprises,cooperatives, and production initiatives in the informal sector , to generate employment and income bymaking loans available to entities that otherwise would have little access to credit.The program initiallyfocused on urban workers in metropolitan regions with the highest unemployment levels. In 1995,credit was also made available in the rural sector. In 2006, roughly 2.8 million loans were offered bythe various programs with an average credit of R$9,000.

Cash transfer programs: the conditional cash transfer program, Bolsa Famlia, serves as a safety net forworkers from poor families. The program was established in 2003 by combining several existing cashtransfer programs. Families with per capita income of less than R$120 per month are eligible to obtainbenefits.More than 11 million Brazilian families received benefits in 2006. A real increase in theminimum wage, which has a direct impact on the income of workers (38 million workers earn less thanthe minimum wage each month), as well as on the income of retired individuals, pension holders andbeneficiaries of support programmes.

Future Outlook

After growing at the most intense pace in fifteen years ,the economy is expected to slowdown from now onfollowing the new tone of macroeconomic policies. Inflation is also expected to moderate although it will only

get near the 4.5% target next year. The withdrawal of fiscal and monetary incentives already started its effectson the economy. However, the burden of the cyclical adjustment will be borne mostly by monetary policy asprimary expenditures are still rising too fast. Credit to the private sector recovered in the last months and is


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expected to continue growing robustly although the monetary tightening cycle and the moderation of economicactivity should constrain future expansions (as well as additional non-performing loans declines).The strengthsof the Brazilian economy kept the country relatively isolated from turbulences coming from Europe. But ifexternal turbulences get worse then the country would be hit.If turbulences in Europe moderate as expected, theReal will remain relatively appreciated, although governments interventions should avoid the currency to tradebelow the 1.70 mark with respect to the USD.

Documents

MEPP Brazil Economy Group2