Brazil entered the new millennium mired in economic difficulties. Macroeconomic conditions will have a great influence on political stability, what kinds of laws are passed, the ability of businesses to succeed, the pace at which new technology is used, the availability of jobs, and on incomes, poverty and crime. Brazil is a constitutional republic of federated states, the federal districts, and territories. This present constitution was proclaimed in October 1988, replacing a 1969 document.
The states of Brazil have their own government with the powers in all matters not specifically reserved for the Brazilian government.
The 1988 constitution abolished the national Security Law, which had been used to stifle political disagreement; outlaws torture. The National Security Law provided for various forms of popular voting, initiatives, and referendums; forbids virtually all forms of censorship; guarantees privacy rights and extends the right to strike to all workers.
The military retains its power to intervene in the political system to preserve law and order. Brazil has long been recognized for its large population, great natural resources, bold ideas and potential for growth.
It has made progress in economic adjustment over the last several years, opening trade, reducing inflation, succeeding with privatization and garnering investor confidence.
However, there have been concerns inside and outside of the country about government finances and especially public pensions, political stability and political will, vulnerability to international economic and financial developments and to the return of high inflation, relatively low investment in export industries, and the social and political consequences of income inequality.
Several studies on Brazilian public opinion towards this country’s vulnerability and its domestic stability prove there is consensus that vulnerability is an impeding factor to the country’s aspiration to a more strategic place among the world powers.
The Brazilian elite views the interests of their country and those of the U. S. as essentially incompatible. During the Expansion of 1600’s, Gold was discovered. Brazil’s other natural resources are bauxite, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, and timber. General Electric is among the many powerful transnational corporations and UE employers with factories in Brazil. Economy overview is possessing large nd well-developed agricultural, mining, manufacturing and service sectors, Brazil’s economy outweighs that of all other South American countries and is expanding its presence in world markets.
The maintenance of large current account deficits via capital account surpluses became problematic as investors became more risk averse to emerging market exposure as a consequence of the Asian financial crisis in 1997 and the Russian bond default in August 1998. After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41. billion IMF led international support program in November 1998. In January 1999, Brazilian Central Bank announces that the real would no longer be pegged to the US dollar.
This devaluation helped moderate the downturn in economic growth in 1999 that investors had expressed concerns about over the summer of 1998, and the country posted moderate GDP growth. Economic growth slowed considerably in 2001-2002 to less than 2% because of a slowdown in major markets and the hiking of interest rates by Central Bank to combat inflationary pressures.
Poor economic conditions may lead to resistance to external cultural influences, while improvement may mean greater acceptance of practices associated with success in other nations and more interaction with cultures that differ in behavior or values. Economic recovery and growth may ease the difficulties of restructuring business and public affairs and opening markets to competition. It may lead to more trade and foreign investment, and a greater role for Brazil in the region and the world.
Alternatively, crises may be the catalysts for change and adaptation to a changing world. The international debt crisis of the early l980s led multinational agencies, the governments of wealthy nations, and a growing number of poorer nations to adopt a reform agenda intended to restore economic stability, restart growth, reduce debt to manageable proportions, and restructure economies to reduce their vulnerability and improve prospects for sustained growth. This international reform agenda expanded dramatically in the course of the l980s and l990s.
At the beginning of the debt crisis, attention focused on macro-economic stabilization measures. That initial task was quickly expanded to include structural changes regarded as essential to restore growth and reduce debt. John Williamson’s 1989 summary of the Washington Consensus listed, in addition to fiscal, monetary, and exchange rate measures, reforms to reduce government intervention and permit markets to function more effectively, including trade and financial liberalization, increased receptivity to foreign direct investment, deregulation, and privatization.
These structural changes mostly entailed dismantling government regulations and restrictions on private economic transactions. The closest the Consensus came to more complex institutional reforms was the rather tentative inclusion, as the very last item, of property rights protection. Williamson noted that this was intended to signal recognition that institutional features were also important determinants of growth.
By l989 the World Bank was beginning to use a broader concept, “creation of an enabling environment [for effective markets]. Williamson remarked that concept might be preferable, but it remained largely undefined. More than a decade later, at the beginning of the new century, the reform agenda has ballooned to include a broad array of institutional reforms, and to emphasize poverty reduction as well as growth and stability. Responsible macro-economic management and reduced state intervention in the economy remain crucial, but they are now viewed as far from sufficient for growth and poverty reduction.
Reform of the state itself, including the civil service, the police, the system of justice, and reduced corruption are part of the essential “enabling environment. ” Social sector reforms in pensions, health and education, as well as far-reaching changes in labor markets and industrial relations are also squarely on the expanded international agenda. These further reforms are much more demanding than the initial agenda: they require not merely the dismantling of regulations, tariffs, and subsidies but fundamental changes in the design and operations of core public functions and institutions.
The Brazilian society is divided in those who approve Cardoso’s programs of stabilization and reforms, and those who favor a rather ‘desarrollista’ (developmental) kind of policy. Those who blame the government and those who blame the opposition for the failure in adopting the reforms needed to avoid the financial crisis regionally, neighboring countries agreed upon Brazil’s high performance in industry, trade, new investments and competitiveness, but their evaluation of Brazil’s ability to guarantee economic and political stability were rather low.
In contrast, the Brazilian public opinion proved much more confident concerning this matter. When the analysis of the public opinion takes into account structural factors, long-term policy results and a rather contemporary perception of competitiveness, it excludes short-term populist expectations, paternalistic and contradictory demand and any resentful mood concerning the international context and the globalized economy. The politics of economic reforms have been much analyzed over the past two decades.
The question of what political capacities and institutional arrangements are key to effective reforms has been one major focus of attention. During the l970s and l980s there was an on-going debate between those who asserted that only authoritarian governments could sustain sufficient macro-economic discipline to manage economies effectively, and those who challenged that view. By the late l980s, it was quite clear that broad generalizations about types of regimes — democracies versus authoritarian systems — were far too crude to offer useful generalizations and explanations.
A much narrower version of the old debate persisted, however, in the effort to determine whether effective economic reforms required considerable concentration of executive authority and power (within the framework of more or less democratic as well as authoritarian systems). Party leader Luiz Inacio Lula da Silva (known universally as Lula), will stick to his recent promises of honoring outstanding contacts. Lula inherited an economy in shambles. Working people suffered as the former government carried out neoliberal policies, including privatization and cutbacks in social programs.
Two million people are unemployed in Sao Paolo alone, the most industrialized region in Brazil, with 1. 5 million young people entering the labor force each year. Lula’s government decided to continue neoliberal monetary policies to reassure business and encourage investment. The results have helped regain economic stability: the value of bonds has increased from 38 to 90 percent of their face value, meaning that far less is spent on public debt. Banks lowered Brazil’s risk assessment. Credit lines are back and new lines of credit are open.
But these results reflect decisions by the government to maintain high interest rates and prioritize growth over income distribution at least in the short run. At the time of the CUT congress, the new government’s most controversial proposal aimed at cutting retirement payments to higher-paid public employees, averting bankruptcy of the system and moving towards an equalization of public and private benefits. This is essentially a proposal from the old government. Default is inevitable, and should be undertaken by Lula as soon as possible, because delaying default simply increases Brazil’s liabilities.
Brazil’s ratio of debt to gross domestic product, even after more than $100 billion of privatization proceeds, has doubled since Fernando Henrique Cardoso became president in 1994, from about 30 percent to 58 percent today – a figure that is climbing as the Brazilian real declines. Of this debt, approximately 20 percent is international (after the country’s foreign exchange reserves have been netted out), of which half is owed to the international financial institutions. In addition, a very large portion of Brazil’s debt is greatly increased in cost by economic turmoil.
Forty percent of total debt is denominated in dollars, so increases as a percentage of GDP when the Brazilian real drops in value against the dollar. An additional 37 percent of debt is linked to the Selic overnight money market rate, so becomes very expensive when, as for most of the last 8 years, uncertainty raises domestic interest rates. A further 8 percent of Brazil’s total debt is inflation-linked, so has been a “good deal” for the country in the last eight years but could become very expensive if the country returns to hyperinflation.
Brazil’s public debt over the 1994-2001 period was 16. 1 percent a year, and the projected real interest rate on Brazil’s public debt for 2002 is 21 percent. If interest rates remain at these levels, the debt will become unmanageable, rising above 100 percent of GDP in 2006-2009, and spiraling thereafter, if policy remains as at present. Brazil’s balance of payments would also be a problem, because public debt is 4 times the level of the country’s export earnings.
The government’s economic policy in 1994-2002 has followed IMF recommendations closely, and been fairly restrictive, with the primary budget surplus (before interest payments) in the range of 3 percent to 4 percent of GDP, although in Cardoso’s first term, 1994-98, budgetary policy was less tight, with only a small primary surplus. The first popularly elected president in Brazil in 30 years, Fernando Collor de Mello took office on March 15, 1990. In September 1992, Collor was impeached by the lower house of the Brazilian legislature on charges of corruption.
In December 1992, Collor resigned as president of Brazil, and the Brazilian Senate convicted him of the corruption charges. There needs to be a change in Brazilians’ elite mentality of entitlement and privilege – in detriment of the nation’s general good. This mentality was inherited from colonial times. Brazilian society is very corrupt and stratified. Each class defends very specific and sometimes conflicting interests, dismissing what is best for the country as a whole. This will take time to change and until it does, the country won’t live up to its potential.
Brazil will only have a bright future when its basic needs such as health and education and issues such as social inequality and wealth concentration are dealt with in a continuous and serious manner. In Brazil, the role of government is much more intrusive than in the United States. This is not only a matter of taxation, but also in legal organization and in the regulatory role. In small and medium businesses, this aspect is less evident. In large-scale foreign investment situations, a close personal official relationship is fundamental. Lobbying by large corporations and trade groups is even more aggressive than in U. S.
Government contracts are often awarded according to relationships and connections rather than pure technical or financial merit. This is a result of the paternalistic, nepotistic culture that has existed for hundreds of years. Brazil has one of the most complex systems of tax law in the world, which consequently makes Brazilian goods more expensive because companies pay more taxes than in other countries. Brazil’s overall tax burden is equivalent to 30% of the country’s gross domestic product, while neighboring countries such as Chile and Argentine have a tax burden equivalent to 15% and 20% of gross domestic product respectively.
Experts say that due to the high tax rates, tax evasion is estimated to be 30% of the total revenue. The Brazilian government is seeking a constitutional change that would simplify the country’s tax system and so make Brazilian goods more competitive internationally. Pedro Parente, executive secretary at the Finance Ministry said the government plans to propose a constitutional amendment to eliminate taxes on industrialized products, a state value-added tax, a city tax on services and two types of social contributions.
It place of all that, the government would like to impose a nationwide value-added tax, state and city consumer taxes and an excise tax on a select list of products as well as remove value-added taxes on goods for export. To change the tax system, the government must amend the constitution, which requires approval by two- fifths of both lower and upper houses of Congress in two voting rounds. New president DA SILVA, who took office January 1, 2003, has given priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation.
Tax revenues were indexed to inflation but many government expenditures were not. Salaries were frozen; basic goods were only chilled down a bit. Government spending far exceeded income, so inflation worked as a mechanism to hide the sins of the federal government. For most of the latter half of the 20th century, inflation has been a way of life for the Brazilians. Basically this was a tax imposed on the poor, allowing government to spend freely. It has been for more than four decades a primary source of public sector financing.
In short, different kinds of reforms pose quite different political challenges, for reasons intrinsic to the character of the reforms themselves. The fact that late-stage reform agendas concentrate on complex institutional reforms helps to explain why the pace of reform in most countries almost always slows substantially after initial stages. To move beyond the broadest generalizations regarding the politics of economic reform and the capacities required to promote them, the concept of reform itself must be taken apart.
Different kinds of reforms pose quite different political challenges. Even the different phases of any specific reform entail different political tasks and demand different tactics and capacities. Discussions of the politics of reform often fail to recognize these variations. Many economists used to B and some still do B talk about “political will” on the part of top-level leaders as the necessary and sufficient requirement for effective reform. Some of the metaphorical language used in discussions of reform convey a similar message: “bite the bullet”, “just do it.
That implicit image of the reform process may roughly describe a single-shot devaluation decision. But it is clearly very misleading for more complex measures. Recognizing the varied character and political challenges of different reforms, and the tendency for complex institutional changes to be late and slow are first steps toward understanding why some kinds of reforms move faster than others, and why the pace of reforms tend to slow down almost everywhere. At the far end of the spectrum are systemic reforms in the major social services, primarily education and health care finance and delivery.
Multiple models are available, influenced by very different national and regional traditions and histories. More important, there is only limited consensus among technical specialists regarding basic principles of reform. Experts argue bitterly over the merits of, say, single-payer health care systems or charter schools. They agree only very partially on the principles that should guide the degree and design of privatization or decentralization. Therefore, public debate regarding the design and priorities of reform tends to be diffuse and inconclusive.
Even after initial agreement is reached regarding social service reforms, implementing them is extremely complex. Executive agencies and legislatures at national, state, and local levels are usually involved. Reforms intended to increase efficiency and save money in the long-run may nonetheless have high up-front costs. Not only the Ministry of Finance but often sub-national financial authorities must concur. Many social sector reforms require years to implement. A great deal of detailed information is required to fine-tune design of successive steps.
Much of that information is not available without new arrangements to gather it. All of these complications are reinforced by the fact that, even where there is widespread dissatisfaction with the status quo, postponing action does not carry obvious and prompt risks. The varied character of different reforms — availability or absence of a consensus model or clear parameters for debate, timetable, number and variety of actors, information requirements, apparent costs of delay — shape the political challenges.
If many actors must co-operate to put a reform into effect, any one of them can weaken or stop the reform. In other words, there are many potential veto actors. Decisions taken by the executive run high risks of being blocked in the legislature or sabotaged in the course of implementation. Moreover, the large number of actors increases transaction and enforcement costs. If implementation takes many years, there are many potential veto opportunities. The length of time required to get most complex institutional reforms up and running also means that the benefits of the reforms may not become apparent for some time.
Therefore it may be hard to mobilize pro-reform coalitions to counter opposition from vested interests, which are likely to resist from the outset. Information requirements also affect the course of reform. Lack of information may stall action; new information may alter perceptions and reopen debates. Complex institutional reforms are the result of an extended process, not an event. The process is subject to stops and starts; issues regarded as closed may be re-opened and steps already taken may need to be repeated. The process is not linear, but iterative.
The varied characteristics of different kinds of reforms also suggests why reforms in some sectors have made much more progress than others, in cross-national perspective. For example, far-reaching pension reforms have been adopted in many more countries, in and beyond Latin America, than have introduced similarly basic changes in education or health care systems. In conclusion, I believe that International Widgets will find that Brazil would be a great place to open shop (do new business). Brazil’s future is largely in it’s own hands.
With there constitutional tax reform there are many changes which in turn will enhance social rights such a job stability, foreign and national capital enterprise, and several other areas pertaining to basic human rights. Brazil risks serious setbacks and instability if it fails to proceed with reform. Inflation, government spending and foreign investment has remained stable. There was general agreement on the need for policy changes. International pressures will help Brazil to make difficult but necessary choices.
There was strong agreement that Brazil would benefit from becoming more international in its business relationships. Nearly all believed Brazil needed to expand its export industries. However, three out of four felt that Brazil was highly vulnerable to international economic and financial disruptions. Doing more to deal with social issues now is important to maintain stability so growth can proceed. Brazil’s economy will soon recover from its recession. -Brazilians believed that Brazil’s economy will be more stable in the future and so do I.
Brazil will continue to have to strike a difficult balance between budget cutting and other policies to promote economic growth and addressing social issues. Domestic stability, in a context of vulnerability to external shocks resulting from globalized factors, is distinctively credited to political, economic and demographic processes whose outcomes can only be expected to occur in the long run. A transition towards a more pragmatic, pedestrian view of politics and politicians is emerging and a highly demanding electorate should be expected to voice new interests and needs.
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