2. INDEX
I The political background
II What is holding Brazil back?
Hyperinflation “Brazil Cost” and Barriers for Opening Business Inequality, Crime and Education
III Causes of Inequality
IV Lula’s first term performance
Macroeconomics indicators Macroeconomics indicators
V Comparing Brazil with the other BRIC nations
VI Off the BRIC?
VII The current scenario
VIII The way forward
3. THE POLITICAL BACKGROUND
15the century Discovered and colonized by the Portuguese
1822 Declares independence from Portuguese rule
1822-1899 Constitutional monarchy
1899 Military coup
Old Republic ‘Cafe com Leite’ (coffee with milk) first signs of Inequality –elitist rule from small
1930-1945
minority
1945-1964 Left-wing Dictator President Vargas developed industrial sector
Second military coup. Democracy under military government 21 years during the Brazilian
1964 Miracle - rapid growth in agriculture, manufacturing & services. Ended in disaster due to the
removal of political rights & torture of political dissidents
4. THE POLITICAL BACKGROUND
1970 - 1980 Emergence of Lula who became leader of the Workers Party (centre-left)
1980 - 1994 Pre-Cardoso era was marked by severe deficit, debt and inflation
1994 Closely lost to Cardoso ( finance minister democrat) –due to the success of ‘Plano Real’
Wins election. Starts first term in office. Prior to this victory Brazilian currency weakened & the
2001
country’s country risk increased
5. WHAT IS HOLDING BRAZIL BACK?
•Government deficits and public debts were growing rapidly and inflation was out Gini
of control. coefficient 0.593
Hyperinflation •Insufficient revenues for earmarked expenses.
•Hyperinflation aggravated Brazil’s social situation; to consider 35% of the
population as poor. Interest rate 48.7%
Real
exchange rate 2.3 Real / $
•Brazil cost
“Brazil Cost” •High Tax burden, overvalued exchange rate and high interest rates.
•Burden of red tape and poor infrastructure. Savings rate 22%
and Barriers for
•Very low position on the ease of doing business index.
Opening •High barriers to free flow of trade within regions of the country. Ease of doing
Business •Low saving rates, high levels of informal workers (50%) and high costs of hiring business 121st
and firing workers.
Days to start
business 152
•Among the highest Gini Coefficients (.568)
•The richest 10% earned 45% of total income, while the poorest 50% earned only
Cost of hiring
Inequality, Crime 14%. a new worker 37% of salary
and Education •Low income individuals had become more prone to commit violent crimes and
to pursue illegal activities out of frustration. 37 weeks of
•Low literacy rate and poor education system.
Firing cost wages
6. Compare Brazils economic performance with that of the BRIC countries. Does Brazil belong
CAUSES OF INEQUALITY
in the BRIC?
Brazil has always “managed poverty” without making efforts to change the
socio-economic order.
Causes of Inequality
Until Lula’s first term in office, no efforts had ever been made to promote the
inclusion of the poorest segments of the population.
Lack of regulations over the labor market.
Complications in implementing effective socio-economic regulations due to the The main reason
size of the population and country (dispersion), cultural differences between the why so many
north and the south regions and high levels of crime and poverty. Brazilian are
living in poverty
Economic power strength of large landowners over “landless” farmers. is not a general
lack of resources,
Exclusion process generated in larger and crowded cities (Favelas). but rather their
distribution.
Inequality and poverty reinforcing effects of the regressive tax system.
Nathalie Beghin -
Discriminatory relationships, not only between rich and poor, but between Notes on Inequality
and Poverty in Brazil
gender and race.
7. LULA’S FIRST TERM PERFORMANCE
Stimulated growth and employment creation
Microeconomics policies
Improved income distribution and reduced poverty and inequality to some extend
HDI improved
Gini Coefficient improved
Passed the Pension Reform Bill ( government spending on pension increased)
Increased citizens’ confidence
More consumer spending
GDP growth
Enacted the minimum wage law
Increased Purchasing Power Indices (help reducing inequality)
Initiated education reforms
Introduced Micro-Credit in Brazil ( e.g. ABN AMRO)
Purchasing power improved, liquidity improved and reduced interest rates
8. LULA’S FIRST TERM PERFORMANCE
Started paying off the line of credit extended by IMF (1998)
Macroeconomics policies
Reduced the foreign borrowing (external debt / exports)
Improved investor confidence
Reduced Inflation , reduced Interest Rate (Exhibit 5 in case)
Swapped dollar denominated bonds with domestic currency debt without devaluing
currency
Reduced the budget deficit to a great extend
Reduced public debt by inviting Foreign Investments to roll over debt
Though interest was high, corporate governance improved
Brazilian securities became more appealing for foreign investors
Rio de Janeiro stock exchange index started moving up.
Influenced the G-20 nations at Cancun Summit (2003)
Promoted export sector aggressively (agribusiness exports)
9. COMPARING BRAZIL WITH OTHER BRIC COUNTRIES
What is a BRIC BRIC is an acronym that refers to the fastest growing developing economies of
country? Brazil, Russia, India, and China
•Consistent economic growth (Real GDP) since 2003
•Large population
•Increasing domestic demand
Characteristics of •Political structure moving towards global capitalism
BRIC countries •Major industries for export purposes
•Strong foreign forex results (dependence on FDI)
•Increasing privatization
10. Compare Brazils economic performance with that of the BRIC countries. Does Brazil belong
DOES BRAZIL BELONG IN THE BRIC?
in the BRIC?
•Huge population – 184 million (2006)
YES! Brazil •Growing domestic demand
•Political structure (democracy but towards globalization)
does belong
•Major industries for export purposes
to the BRIC •Strong foreign forex results (FDI – $16B)
nations •Privatization
•Human development index (2003) – 0.792 (2nd highest behind Russia)
There are still many issues which hinder Brazil’s progress in competing with its fellow BRIC’s
Brazil cost
•Slow real GDP growth – 2.7% compared to China (10.2%), India (8%) and Russia (6.9%)
•High Gini coefficient (0.593)
•High tax rates (72 %)
Issues to be
•Low savings compared to BRIC (22%)
addressed •Highly overvalued currency
•High interest rates (48% lending, 16% investing)
•Agri-business oriented
•Cost of hiring and firing worker very high compared to the rest of the BRIC
•Ease of doing business lowest among BRIC nations
11. Compare Brazils economic performance with that of the BRIC countries. Does Brazil belong
THE WAY FORWARD (Team Recommendations)
in the BRIC?
1 Currency re-evaluation. Currency exchange rate is 2.3 Real to the USD.
2 Immediate tax rate cut
3 Reduce interest rates
4 Increase FDI
5 Rework the fiscal policy: Reduce CRR rate, reduce bank rate
6 Improve infrastructure
7 Support manufacturing industry
8 Reduce ‘Brazil cost’ specifically inequality issues
9 Maintain policy of bringing educated people into the cabinet and into power
10 Rethink protectionist policies
12. THE WAY FORWARD (Team Recommendations)
Phase I Phase II:
Devalue currency
Liquidity increases
Reduce taxes
Reduce CRR and bank rate Purchasing power increases
GDP
Increase transparency growth in
Investment and FDI increases excess of
Encourage SME through VC 5%
Government losses due to tax
Increase privatization
cuts
Increase spending on
infrastructure and education Inflation goes up
Notas del editor
Louise - Introduction 1.Sandya - What is holding Brazil back? -Hyperinflation -Brazil Costs -Inequality, Crime & Education2. Eric – Inequality in Brazil – CausesSunil – Lula’s Performance -Micro / MacroEric – Improvement 3. BRICLouise - What and why BRICJomy - Recommendations
Brazil6th largest country by area ( 8 million square km)8th largest economy in the worldNamed Federal Republic of Brazil186 million people – 5th most populousExtremely unequal country – no social mobilityGini Co-efficient of 0.56 (worst in South America), one of the worst in the worldLong-term consequence of the colonization strategies followed by the PortugueseFirst European to discover Brazil was Portuguese Pedro ÁlvaresCabrill in1500. From the 16th to the 19th centuries, Brazil was a colony of Portugal. 1822 country declared its independence from Portugal and became a constitutional monarchy, the Empire of Brazil. A military coup in 1889 established a republican government. The country has been nominally a federal republic ever since, except for three periods of overt dictatorship (1930–1934; 1937–1945 and 1964–1985).1964 military overthrew President Joao Goulart, who was rapidly moving to the left. For the next 21 years, Brazil was ruled by a succession of military governmentsNew constitution in October 1988. 1989 - Fernando Collor de Mello was elected, after a close electoral race with Luis Ignacio de Souza (LULA) representing the always very vocal left. The centre-left also often favours moderate environmentalist policies and generally, though not universally, supports individual freedom on moral issues.
Lula might have won, except for: (1) Eastern Europe deciding they had had enough of the very thing Lula wanted for Brazil. This was very embarrassing for Lula and his supporters, who went on TV to try to convince the people that the PT's (Worker's Party) had nothing to do with Communism in Europe. (2) Roberto Marinho, the owner of the Globo network and most powerful man in Brazil, was afraid that a left wing government would nationize his property, so he backed Mello. (3) Some of the usual dirty tricks all politicians pull on each other1994 – Fernando Henrique Cardoso finance minister defeated left-wing Lula da Silva again. He was elected president due to the success of the so called Plano Real. Re -elected in 1998, he guided Brazil through a wave of financial crises.Severe problem highly unequal distribution of wealth and income, one of the most extreme in the world. socio-economic contradictions helped elect LuizInácio Lula da Silva in 2002.
WHAT IS HOLDING BACK BRAZIL’S ECONOMIC GROWTH According to the Lula case, even the exciting and critical journey of Luis Ignacio “Lula” da Silva, who was born in the poor northeast of Brazil with only an elementary school education, went from factory worker to union leader, to leader of the worker’s party proves the difficult economic environment of the Brazil. Severe economic difficulties with high government deficits and public debts, high ‘brazil’ cost, hyperinflation, low income & poverty, inequality and poor education systems had holding back Brazil’s economic growth since 1960s until early 2000s. Hyperinflation Government deficits and public debts were growing rapidly and inflation was out of control.Insufficient revenues for earmarked expenses. Hyperinflation aggravated Brazil’s social situation where 35% of the population were poor.Main disadvantage relative to other BRIC countries was the “Brazil cost” which were the ‘cost of inefficiencies’ of Brazil’s economy.Slow growth as compared to other countries due to high tax burden, overvalued exchange rate and the high interest rates.Brazil cost also included the burden of red tape and poor infrastructure.More regulations such that on average it took 152 days to comply with all the red tape to start a new business (5 times longer than other BRIC countries).616 days were required to enforce a simple credit contract.“Very low” position in terms of ‘ease of doing business.The foreign debt default triggered a major financial crisis and the fall of military regime.Each region worked independently which caused increased barriers to free flow of trade.High costs of hiring and firing a worker rose to 37% of the annual salary.Extremely burdensome high tax rates where the average tax burden for a business was 72% out of profits. Informal operation of businesses led Brazil to be the lowest BRIC country having savings rate of 22%. Inequality and Education Gini coefficient in 1990 was 0.6, however in 2005 it only dropped to .568 which clearly shows a lack of progress of inequality in income.In Brazil, the richest 10% had earned 45% of total income, whilst the poorest 50% attained only 14%.Concentrated distribution of land, i.e. 1% of farmers controlling 46% of all available land in the country.Higher inequality in Brazil directly linked to violent crimes.Low income individuals becoming more prone to commit violent crimes and to pursue illegal activities out of frustration.For investors, crime and violence had added an element of uncertainty to their risk assessment of Brazil.Market analysts downgraded Brazil’s ‘short-term ratings’ due to crimes.Insecurity due to kidnappings and armed robbery led to high air transportation cost for top executives. In 2002, city of Sao Paulo had more helicopters (220) than New York, Tokyo, Los Angeles, Frankfurt, London, Rome and Chicago combined.Inequality had given rise to slums which were controlled by heavily armed drug gangs which had been a major source of economic and social risk.Even in late 1990s 16% of Brazilians had never been to school while in 1960s 50% over 15 years of age had no education at all.Poor education system and quality had lead to difficulties for social mobility.Disparity among levels was maintained due to spending disproportionately more on higher education.
The first term for Lula in brazil was at a time when Brazil was facing the after effects of the Russian crisis of 1998 and the Asian crisis of 1997. At his time of entering office the main source of national income was Brazile’s exports to China and Russia. When Lula entered the office, Cardoso had already set the pace with a slow growth and high government debt. The after-shocks of the disaster of “Brazilian miracle” in 1982 was so heavy that Lula had a tough time achieving both economic growth and reducing inequality at the same time. He was not in a position in devalue his currency because he wanted to reduce the government debt denominated mainly in dollars but without devaluing the currency, it was difficult for brazil to attract more Foreign Investment. This put Lula in a catch-22 situation but still with the resources available at his disposal and the bad shape of the economy he had done his level best in making both ends meet. The token of appreciation for him would be for the good progress the Brazilian economy has made during his first term in office. The achievements made by brazil in that period would be as given below:Stimulated growth, economic stability, employment creation.Improvement in income distribution, thereby started reducing poverty and inequality. He initiated the cash transfer program for this.Gini coefficient which was once the highest in Latin America was brought down in his first term.Inflation and exchange rate stabilised Increased government savings in that period and paid off the balance owed to IMF which increased the investor confidence in Brazil.Increased liquidity in the market which reduced interest rate.Paid off the dollar denominated bond without currency devaluation, which helped government to reduce deficit.Reduced the serious aftershock of the disaster of “Brazilian Miracle” which made the economy in crisis due to excessive foreign borrowing and suspended repayment on foreign debt.Lula is to be given credit for reducing government deficit and public debt by inviting FDI to roll over the debt.Through high interest and improved corporate governance , Brazilian securities became more attractive to foreign investors.Through the swapping of dollar bond to domestic currency debt, he could achieve budget surplus ( exhibit 10) for the first time.Passed the pension reform bill which improved the citizens’ confidence.Savings rate which was lowest among BRIC started improving.Promoted export sector aggressively, through the influence of G-20 countries (cancun ,2003) which forced US and Europe to reduce tariffs.Passed the minimum wage law to increase the worker’s wages which helped in reducing inequality.Education reforms and reducing crime rate.Increased micro credit through bank chains like ABN AMRO.Initiatives to convert Brazil from agri-business to manufacturing based economy.In Lula’s term Brazil became the largest exporter of sugar, beef, soy bean, orange juice, chicken and meat. An export oriented economy has the maximum macro economic stability.
What is a BRIC country?BRIC or BRICs is an acronym that refers to the fastest growing developing economies of the Brazil, Russia, India, and China, considered until recently as the developing countries of the third world. According to Goldman Sachs by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world, the G6 (US, Japan, Italy, France, Germany and the UK).The acronym was first coined and prominently used by Goldman Sachs in 2003, since where that time the term has appeared prominently in both business and academia.Characteristics what are they?:Commonalities amongst all BRIC countries include: - consistent economic growth since 2001, - Huge land mass & population - increased mobility of labour as population grows , high percentage of working class - Growing Domestic demand - all types of consumption of the market– demand increases when the Purchasing Power of the consumer increases - Political Structure of Federal Republic (A federal republic is a federation of states with a republican form of government. A federation is the central government. The states in a federation also maintain all political sovereignty that they do not yield to the federation) - Moving toward a Capitalist structure embracing global capitalism -Major Industries for export purposes - Natural resources Brazil Iron Ore & Soy, Russia Natural Gas & Oil, China finished goods -textiles, manufacturing, electronics., India coal. Metals Manganese -Strong foreign forex - highly dependent on FDI (Foreign Direct Investment) into the countries , Tourism growing -Privatization - moving from public arena into private sector i.e. Financial services, manufacturing, telecom, transportation
