1. Paulo Vicente LCDR/USN
BRAZIL
An Economic Success Story?
Introduction
Since I have only 10 slides, I will do my briefing differently by providing opportunity for questions after briefing each slide.
My presentation explores the Brazilian economy and tries to answer the question presented: “Is Brazil an economic success story?”
Paulo Vicente
LCDR/USN

2. Presentation Overview
Background
Country Profile
Political System
Economy
Macroeconomic Indicators
Import Substitution
Export Oriented
Performance
Challenges
Economic Outlook
My presentation will cover these four major topic areas. But the focus will be the Brazilian economy.

3. Background: Country Profile
Former Portuguese Colony
Independence Sep 1822
188 Million
W-53% M-38% B-6%
Roman Catholic
½ Latin America Landmass
½ S. America Population
81% Live in Urban Areas
5th Largest Country
9th Largest Economy
Map Source:
Self explanatory.
W= White M=Mixed race B=Afro-Brazilians

4. Background: Political System
3 Branches of Government
5 Administrative Regions
26 States + 1 Federal District
81 Federal Senate
513 Chamber of Deputies
Military Regime
Voting Mandatory
15 Parties Represented
Dual Transition (Political & Economic)
Map Source:
1985 Democratization; 1988 Constitution is the 7th since 1824
Fragmented party system; Undisciplined parties; Frequent party switching while serving; Lack of vertical & horizontal accountability
There are about 15 parties represented in congress, but usually there are only 5-7 effective parties. The key here, is that unless an effective coalition can be build economic reforms would be difficult
Both Cardoso (the former President) and “Lula” (the current President) have done a great job in maintaining an effective 10-party coalition
Also, the Brazilian economy has performed relatively well, especially given the fact that most most countries that have attempted dual reform path have not done so successfully

5. Economy: Macroeconomic Indicators
Diversified Economy
Industry & Manufacturing (37% GDP)
Agriculture (9% GDP)
Services (53% GDP)
Energy
Hydropower Power
Nuclear Power
Ethanol
Foreign Oil
The shift toward market economy has also meant more Foreign Direct Investment in Brazil
The government has managed to keep the inflation low; Inflation currently holding at about 5 percent; They have done it through fiscal discipline and sound monetary policies (interest rate)
Brazil has a strong diversified economy
The informal economy accounts for roughly 40% GDP and 50% of urban employment (mostly in the city slums called “Favelas”), resulting in a loss of taxable income
Energy
Hydropower provides 92% of the nation's electricity
Two Nuclear Reactors (3rd in Construction)
40% Vehicles Powered by Ethanol
Dependency on foreign oil has dropped from more than 70% to about 33%
On the right side
Human Development Index (HDI) measures the standard of Living (i.e., literacy, life expectancy, education) the higher the number the better the conditions
Gini index measures inequality of income distribution. A scale of 0-1 is used, with 0 indicating perfect equality. The current score of 57 is actually an improvement – from 1989 to 2004 is Gini has been around 63.

6. Brazil’s Economic Transition
Economy: Import Substitution
Brazil’s Economic Transition
Import Substitution Industrialization
Export-Oriented Industrialization
Neoliberalism
Mercantile Economy
Source:
$8B
$46B
ISI
Protectionism
Productivity
Consequences
EOI
Trade
Investment
Import Substitution Industrialization
Prior to 1994 Brazil strategy and policy favored Import Substitution Industrialization form of Mercantilism
ISI strategy shielded Brazilian state-sponsored enterprises from foreign competition; and for a while, economic growth was sustainable because of Protectionism (tariffs, restrictions, and other forms of market barriers)
While ISP might result in healthy short-term growth, it diminishes incentives to innovate and become more efficient
Like the other Latin American countries, Brazil had accumulated huge amount of debt in order to sustain its inefficient government-sponsored enterprises
However, as the global market changes began to shake the foundation Brazil’s import substitution model, the government-sponsored enterprises could not effectively compete because of Low productivity and poorer quality products. In 2004 Brazil’s productivity per hour worked was only 18 percent of the US level. There is a 60% productivity gap between Brazil and the U.S.
Furthermore, the high inflation caused exports to become less competitive and imports more so, leading to growing deficits in trade
The combination of regional financial crises, high debt, excessive spending and poor monetary eventually led hyper-inflation (which I will brief later)
Export-Oriented Industrialization
Brazil is one of the last countries in the region to shift from a state-led economy to market economy
Today, it has a relatively strong export-oriented economy. Monthly exports total about $12 billion USD; has over $105Bil USD in reserves, and $46B USD Surplus (2005)
Interest rate is about 9%, down from 18% in January 2001, and about 60% during the period
The shift toward market economy has also meant more Foreign Direct Investment in Brazil; U.S. and MERCOSUL are the major trading partners
Major Exports
Agriculture World’s number one producer of Coffee, Sugar Cane, and Oranges
Mining Number four producer of Tin, #6 in Gold, and #6 in Aluminum
Industrial Sector Major exporter of Aircraft, electrical equipment, motor vehicles & parts

7. Economy: Performance (GDP)
Shock Therapy
Cruzado Plan
Bresser Plan
Summer Plan
Collor Plan
Collor Plan II
Real Plan
Recession
This chart shows some of the major factors impacting the Brazilian economy from 1986 to 2004.
IMF financing played a significant role in shaping the Brazilian economy
In the early 1970s Brazil seemed to be the model for the developing world. However in the 1980’s, that all changed as the fallout of the 1970s oil crisis began to impact it import substitution economic model. A series of economic plans and force devaluation did not significantly affect the high inflation
Meanwhile, as Brazil continued to carry out both political and economic reforms, it had to deal with several unexpected external crises.
Serious economic reforms did not occur until 1994, when the economy was in really bad shape with hyperinflation reaching 2500 percent.
In 1994, the newly elected president Fernando Cardoso (former finance minister) implemented the “Real Plan,” which address three key areas:
Fiscal Policies (reducing big government budget, including pension and social security for government workers)
Monetary (eliminate hyperinflation through higher interest rate and adopt floating exchange rate). Currently inflation is held at about 3%
Market Economy (privatized some of the government-sponsored industries, allow more foreign investment)
87-94: Hyperinflation
Inflation
400%
1700%
2600%
<50%
Russian Crisis
Political Reforms
Mexican Peso Crisis
Asian Crisis
Argentine Crisis

8. Challenges 22% Poverty Afro-Brazilians Poorest Literacy Rate 89%
1% Control 45% Farmland
1% gets 50% GDP
Rising Crime Rates
Public Security
Wealthy Brazilians have an income 18 times higher than poor Brazilians; 1% of the rich population receives 10 per cent of total national income
50% of the poor population receives 10% of the national income.
Sustainable development is undermined by crime; Five Brazilian Cities are among Latin America’s top fifteen violent crimes cities
The murder rate in the US is about 5 per 100,000 people, whereas in Brazil it is roughly 26 per 100,000 (that is also more than double its 1980 rate).
Although raising the interest rate strengthens the currency, it continues to hurt the poorer Brazilians by increasing the cost of borrowing money
A new family stipend called “Bolsa Familia” was created to provide low-income families a minimum income. It is uncertain what long-term effects this will have

9. Concentration of Industries
Poorer Region
Half of Brazil’s Economy

10. Economic Outlook Opportunities Domestic Challenges Global Challenges
Regional Integration
Globalization
Domestic Challenges
Fragile Political System
Bureaucratic Barriers
Public Debt
Productivity
Poverty & Inequality
Global Challenges
Barriers to Trade
Regional Competitors
US & Global Economy
Opportunities
Basic Macroeconomic data have been promising
Economic growth target is 5%. Estimated 2007 growth is 4.5%
Brazil’s economic strategy for sustaining the desired economic growth is focused on two key components
Regional economic organizations, in particular MERCOSUL and FTAA – Free Trade Area of the Americas
World economic organizations, such as WTO and G-20
Whether political or economic Brazil’s strategy is centered on regional integration and international engagement
Key domestic challenges facing Brazil
High debt (50% GDP). Foreign debt approx. $150 billion
High business taxation (Businesses account for as much as 85 percent of the tax burden – 41% in the U.S.)
High interest rate among (currently about 9%)
Fragmented political parties, which could potentially derail economic reforms
Low productivity continues to hurt the economy. Government-sponsored enterprises are also less productive than their private domestic counterparts.
Government bureaucracy also hurt the Brazilian economy. For instance, it takes about 150 to establish a business in Brazil (5 days in the US); and the cost of firing an employee is about 165 weeks pay (8 weeks in the US)
And of course unless the issue of poverty & inequality is addressed, it could threaten internal stability thereby affecting economic performance
Global Challenges

11. Is Brazil an Economic Success Story?
CONCLUSION
Is Brazil an Economic Success Story?
Economic Performance
Source: Bertelsmann Transformation Atlas (BTA)
This slide shows a macro-level comparison of Brazil and China’s economic performance.
For those who are not familiar with the Bertelsmann Transformation Atlas, the closer the red or blue line is to the outer grey circle the better the performance.
Thus, if you believe that China is an economic success story, then so is Brazil.
As you can see on this chart, Brazil’s overall economic performance is equal to or exceeds that of China. This is consistent with Goldman Sach’s “BRIC” report, which predicts that Brazil could become the world’s fifth largest economy by the year 2050.
However, Brazil is also faced with significant socioeconomic challenges, such as violent crimes, poverty and income inequality, which could undermine its economic growth.

12. Questions?

13. BACK UP SLIDES

14. Compared to Chile Economic Performance
Source: Bertelsmann Transformation Atlas (BTA)

15. Inflation