rcs investments: brazil special report

7/27/2019 RCS Investments: Brazil Special Report

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| Rodrigo C. Serrano, CFA| SIPA | Columbia University

Master of InternationalAffairs ’14 Candidate

| New York City, NY| 01-305-510-0181| [email protected]

October 24, 2013

LATAM Report October 2013: Brazil

Brazil’s emergence as a significant economic force over the pastdecade generated noteworthy investor enthusiasm. From 2003 to2008, an amalgamation of principal factors such as: macroeconomicstability stemming from prior reforms in the country, a recoveringU.S. economy from its 2001 recession, historically low global interestrates, appreciating commodity prices, and rising demand from China

set the stage for a sustained period of solid economic growth in Brazil. While most of the aforementioned tailwinds provided a soundincubator for solid economic growth across all BRIC nations during the same period; Russia, India, and China averaged 7.1%, 8.0%, and11.3% respectably; it was Brazil that more than doubled its rate of growth from 2.0% during 1997-2002 to 4.2% from 2003-2008according to the World Bank. This improvement was the best among the BRIC nations.

As the 2008 financial crisis approached, many prominent investors and academics,fond of the bullish long-term prospects of the BRIC nations, entertained the decoupling thesis. From the Economist: “Yet recent data suggest decoupling is no myth. Indeed, it may

yet save the world economy. Decoupling does not mean that an American recession will haveno impact on developing countries… The point is that their GDP-growth rates will slow bymuch less than in previous American downturns” (Economist: The decoupling debate). While the American downturn and subsequent financial crisis did precipitate a global recession largely debunking the idea that BRIC nations could step in and save the world economy,investor interest in Brazil only intensified when the event seemed like it would be little more than a slight bump in the road in terms of economic growth. Brazil’s economy registered ascant contraction of 0.3% in 2009, which was then followed the following year by thestrongest pace of annual growth in 25 years at 7.5%. Furthermore, Brazil’s Bovespa indexrocketed higher from the nadir of its stock market crash in late 2008 by roughly 129% by theend of 2009, the second best performance among BRIC nations over that period after Russia’s

MICEX index.Despite these impressive performance statistics, since peaking in 2010, economic

growth has been widely lackluster, souring investor sentiment and bringing into the spotlight the panoply of structural problems facing Latin America’s largest economy. This extensivereport covers a brief economic history of Brazil, a focus on the country’s current economicimpediments, and steps for positive future development.



Disclaimer:Pleasefirstconsultyourfinancialadvisorforallimportantinvestmentrelateddecisions 2

History

Brazil’s economy is well diversified,having gone through profound

transformation beginning in the late 1930s with the establishment of the Estado Novo by Getúlio Dornelles Vargas. During this period important building blocks, such as the formation of Companhia SiderúrgicaNational in 1941 and Companhia Vale doRio Doce in 1942, were established inorder to overhaul Brazil’s largely coffee- based economy, which suffered from a plunge in coffee prices during the GreatDepression, into a more diversified modern

industrial state. Impetus for reformstemmed from Brazil’s high vulnerability to terms of trade deterioration, which would lead to capital flight. Economic growth throughout World War II was relativelymuted and largely consisted of a recoveryin the utilization of excess capacity caused by the Great Depression. This interval was followed by a brief period (1945-1953)of trade liberalization coupled with a fixed-exchange rate. These policies precipitated

another balance of payments crisis. It wasduring Vargas’s second term (1951-1954) that Import Substitution Industrialization(ISI) was strongly embraced.

ISI was an economic policy espoused by the Singer-Prebisch thesis of inherentinequality in the world economic system.The policy stressed domesticmanufacturing of products in order toreplace imports. Various tools wereimplemented to achieve this goal including:high tariffs to increase the costs of imports to the consumer, discouraging demand;government subsidies to increase adomestic company’s competitive advantage versus its foreign competitors; and anovervalued exchange-rate to discourageforeign direct investment, while facilitating

purchases of capital goods by domesticcompanies to invest in domestic industry.

“Latin American economists, in the eraafter World War II, argued thatstructurally the global economy worked infavor of countries in the core of the systemand against countries in the periphery.The periphery supplied raw materials and was dependent on the core for markets,investment, credit, and manufacturedgoods. In general the prices for rawmaterials and agricultural commoditiesremained low and the cost of manufactured

goods rose. The structural argument wasused to promote import substitutionindustrialization or ISI. Domesticmanufacturing was encouraged to replaceimports” (Blouet p.8). Over the following3 decades until the 1980s, Brazil wouldincorporate varying degrees of ISI tonurture its infant industries and diversifyits economy.

The results of ISI throughout Latin

America were mixed in general. Returning to Blouet:“Advantages of Import SubstitutionIndustrialization were: 1. Economies become more diversified and lessreliant on commodity exports; 2.Manufacturing adds value in the production process and generatesincome; 3. Industrialization creates jobs and should reduce unemployment; 4. Producing goods at home reducesimports and outflows of currency; 5.Higher protective tariffs on importsgenerates revenue for governments…Disadvantages of Import SubstitutionIndustrialization: 1. Competition fromimported goods is lost; Consumers payhigher prices; 2. The licensing, bygovernment agencies, of favored




manufacturing companies opens the process to political pressure andcorruption; 3. Favored companies canallocate the market between them and

not compete aggressively; 4.Manufacturers, with a comfortablemarket share, might have littleincentive to invest in the latest technology. Efficiency and the qualityof goods lags; 5. ISI usually results inhigh priced goods, few of which arecompetitive in export markets” (Blouet146).

Brazil’s industry indeed flourished, transforming from one focused on the

production of consumer goods into one with emphasis on the production of heavyindustries and their inputs. Moreover, traditional industries, such as food products, textiles, and clothing werereplaced by more capital-intensive and value-added industries such as transportation equipment, machinery,chemical production, and appliances. Inaddition to Companhia SiderúrgicaNational and Companhia Vale do Rio

Doce, other prominent companies formedduring ISI include: Petrobras (founded1953) and Embraer (1969). Throughout the late 1960s and early 70s, extraordinaryeconomic growth approaching double digit percentages became dubbed as an“economic miracle.”

“The average growth of industrialoutput between 1945 and 1979reached 8.8 per annum. Themagnitude of structural change in the

post-war years can be seen, firstly, by the share of the industrial sector in theGross Domestic Product (GDP), which grew from 24.1 percent in 1950 to 40.9 percent in 1980 – whereasagriculture declined from 24.3 percentin 1950 to 10.1 percent in 1980.Secondly, modern industries such as

machinery, electrical materials, transport equipment and chemicals performed particularly well. Theirshare in manufacturing output jumped

from 12.6 percent in 1949 to 43.6 percent in 1980. By contrast, traditional manufacturing experienceda sharp relative decline, the mostnoticeable cases being those of thefood and textile industries, which sawa reduction in their share of manufacturing output from 31.9 and18.6 percent in 1949 to 13.9 and 6.4 percent in 1980, respectively”(Colistete p. 6).

The global recession of the late 1970sand early 80s signaled the beginning of theend for ISI. While the policy producedmany positives for Brazil’s economy, 2 pronounced negative features precipitatedits demise: chronically high inflation fromhigher costs of domestically made goodsand consistent current account deficits due to an overvalued exchange rate, which were financed with mounting externaldebt. Before the recession, the expectation

from investors financing this debt was thatISI would result in a solid manufacturing base with substantial upside in the exportmarket. Subsequent current accountsurpluses would then be used to pay back the debt. Unfortunately, Brazil’s terms of trade deteriorated significantly throughout the 1970s, beginning in 1973. “TheOrganization of Arab Petroleum ExportingCountries (OPEC), which brings together the world's largest producers, cancels

exports of oil to countries that supportedIsrael in the Yom Kippur War againstEgypt to Syria. The product's price rosefour times higher. Brazil is hampered because it was still a major importer: in the1970s, about 80% of the oil consumed in the country was imported. The ‘Brazilianmiracle’ begins to slow down and the




country's foreign trade shows deficit”(Brazil Government Website). Thesituation was further exacerbated with theIranian Revolution in 1979. “The oil price

skyrockets again with the IslamicRevolution in Iran (one of the world's largest oil producers) and due to fears of rationing in the United States, whichincreases interest rates to try to control thedomestic crisis. Automatically, Brazil'sforeign debt toward the U.S. rises sharply.Moreover, Brazilians face rising cost of fuel and rationing queue at gas stations”(Brazil Government Website). WhileBrazil’s terms-of-trade was deteriorating,

the country still maintained a high rate of growth in 1980. However in 1981-1982 the Brazilian economy finally succumbed to the increasing headwinds of higherinterest rates due to the Volker Shock andsubsequent falling global aggregatedemand, which further dampened thecountry’s exports. Brazil’s high externaldebt came increasingly into focus in theminds of investors as it became progressively clear that high external debt

levels in tandem with current accountdeficits were unsustainable. The issue was brought front and center with the advent of the Mexican Debt Crisis in 1982; investorappetite for emerging market debt driedup. Unable to rollover a portion of itsmaturing external debt, Brazil was forced to seek aid from the IMF.

The IMF delivered aid but with stringsattached. Brazil’s long-standing policy of ISI was to be significantly reversed, paving

the way for trade and economic liberalization; meanwhile, austerity was to be implemented to reduce imports. During the same period (1980s decade), manyother Latin American economies requestedassistance to combat what eventually became a region-wide external debt crisis.This period came to be known as Latin

America’s lost decade. While the policy prescription resulted in renewed currentaccount surpluses for Brazil, economicactivity remained lackluster and inflation

was still a constant problem due todevaluations of the cruzado; stagflationhaunted Brazil the entire decade. Brazil’s10-yr average GDP growth from 1981-1991 averaged only 1.65%.

Throughout the 1980s, there werenumerous unsuccessful attempts to subduerising prices. The main components of theCruzado Plan in 1986, the Bresser Plan in1987, and the Summer Plan in 1989introduced price freezes and eliminated

indexation. However these policiesultimately failed due continued neglect of the country’s dismal state of its publicsector budget. High debt levels emergedafter the government assumed the externalobligations of state-owned companiesengaging in high import activity over the prior decades. Furthermore persistentfiscal deficits, resulting from engrainedconstitutional mandates, repelled investorsfrom national debt and led to high interest

rates and a depreciating currency. It wasuntil 1994 when the government finallyattacked the main issue of fiscal reform with the introduction of the Plano Real.

Fernando Henrique Cardoso,appointed finance minster by PresidentItamar Franco, introduced the Plano Real which consisted of 3 main components: a balanced budget rule, a moderate processof general indexation, and the introductionof the dollar-pegged Real. Brazilianindustry, molded by decades of ISI, wasgenerally not competitive in the globalmarket place. Therefore the plan initially led to large current account deficits due toa substantial appreciation in the realeffective exchange rate. However,investors became more tolerant of external




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Brazil'Real'GDP'(Annual)'

Chart: RCS InvestmentsSource: Bloomberg

imbalances given stabilized inflation, theestablishment and enforcement of the balanced budget rule, as well as the fadingmemories of the debt crisis in the 1980s.

These factors led to stabilization inmacroeconomic conditions. Furthermore, prudent structural and social reforms wereinitiated by the Cardoso (1995-2003) andLuis Inácio Lula da Silva (2003-2010)administrations. The former advanced a privatization program that had beeninitiated by the Fernando Affonso Collorde Mello administration (1990-1992),improving economic efficiency, while the latter emphasized social development via

programs such as the Bolsa Família. This program has received worldwide acclaimas a major factor in sharply reducing poverty in the country.

On the back of these reforms, Brazilhad in place solid fundamentals for longer- term economic growth; however, the positive news didn’t end there. The

emergence of China in the early 2000s,combined with a recovering U.S. economyafter the 2001 recession, and a prolonged period of low global interest rates led to acommodities boom and became asignificant long-term tailwind for Brazil.The synthesis of all these factors led to 15uninterrupted years of growth as well as the emergence of the Brazilian servicesector and consumer.

However, as has been the case with the

rest of the global economy and its majorcomponents, the 2008 financial crisis became the trigger that has now exposed the major economic weaknesses of Brazil.

Current Economic Impediments

As a powerful wave of fiscal and monetary stimulus wasunleashed to combat the Great Recession, Brazil’s shallowcontraction in 2009 was followed by the country’s best annual

growth in 25 years at 7.5%. This initial performance generatedmuch investor enthusiasm. Since then however, economicgrowth has generally gone south. This disappointing performance has brought attention to a myriad of interrelatedfactors, which are significantly inhibiting Brazil’s long-termeconomic potential.

Lack of Competitiveness

To begin, a lack of competitiveness, known to locals as theCusto Brasil (Brazil cost) , stems from a combination of elements, the most prominent consisting of: high taxes and acomplex tax system, a notoriously low level of infrastructurespending, a relative isolation from global trade, elevated wagecosts, topped off with an overvalued exchange rate. The high total tax burden, at roughly 36% of GDP according to TheEconomist, ranks 2nd in Latin America to Argentina andcompares poorly with the regional average of roughly 20%.High taxes are passed onto the consumer. An even bigger

> Custo Brasil stems from a

combination of elements, the

most prominent consisting of:

high taxes and a complex tax

system, a notoriously low level of

infrastructure spending, a relative

isolation from global trade,

elevated wage costs, topped off

with an overvalued exchange rate.




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Trade&as&a&%&of&GDP&.&2012&

Source: World Bank Chart: RCS Investments

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Brazil'Unemployment'Rate'

Chart: RCS InvestmentsSource: IBGE

issue is the tax system’s complexity, which leads to highercompliance costs for firms. According to the InternationalFinance Corporation and World Bank’s 2013 Doing Businessreport, Brazil ranks as the world’s worst in time invested per

year to ensure compliance with tax laws at an astronomical2,600 hours, almost a third of the entire year. To better put this metric in perspective, the second worst offender is Boliviaat 1,025 hours, less than half that time.

Another contributor to higher costs is the wretched state of infrastructure, which raises costs for firms as they deal with less efficient means of transportation and production. Thestatistics are grim. “The McKinsey Global Institute estimates the total value of Brazil’s infrastructure at 16% of GDP. Other big economies average 71%”(Grounded; The Economist p. 9).The World Economic Forum’s 2012-2013 Global

Competitiveness (GC) report further corroborates this view.Out of 144 countries, Brazil ranks 107 th in the quality of overallinfrastructure. Visitors for the upcoming 2014 World Cup willsee this sad state of affairs first hand; the quality of air transport infrastructure (ie airports) ranks 134 th, or the 7 th percentile. Port infrastructure ranks an even worse 135 th.

Brazilian trade comprises 27% of its GDP, much lower than the 69% South American average according to WorldBank 2012 statistics. A major culprit and legacy of ISI, highimport tariffs, further leads to increased costs for consumers as

well as the emergence of inefficient industry. Again, a look at the GC report slots Brazil in 123rd spot in the “Trade tariffs, %duty” category.

Finally while economic growth may be sluggish,unemployment remains very low at 5.4% for September. A tight labor market adds upward pressure to wages. But thisdynamic is only a part of the story. Government policy of largeincreases in the minimum wage over the past decade, which isset to continue until 2015, is the central underlying impetus.Combining both these ingredients along with what has been a long-term appreciation in the real has led to spiraling unit labor

costs. “Since 2003 the country’s unit labour costs havedoubled, compared with inflation at 67%. In dollar terms theyhave trebled, thanks to currency appreciation” (Grounded; TheEconomist p. 6).




Fiscal Dynamics

Brazil’s unique structural problems extend to an increasing lack of fiscal flexibility. A policy of fiscal expansion isconstrained by a deteriorating budgetary situation. Grossgovernment debt as a percent of GDP, at 60% (or nearly 70%according to the IMF’s negative definition) is high for amiddle-income country. Furthermore, a recently loweredgovernment target for the country’s primary surplus of 2.3%(from 3.1% in 2012) is increasingly looking like wishful thinking. On a rolling 12-month basis, the primary surplus in August was just 1.82% of GDP. A source of the fiscal profligacy is rooted in Brazil’s pension system. To wit:

“…picture a 73-year-old retired public prosecutor. He is living very comfortably on a generous government pension – around 20,000 reais a month, more than ten times the

average wage. With three children from a previousmarriage and one from an affair, he is now married to a beautiful 30-year-old with whom he has a fifth child. Lifeis sweet. After 12 more happy years he dies. Naturally his widow is distraught, but her financial future is assured.For the rest of her life she draws almost his full pension,increased annually by at least the rate of inflation. Whenshe dies 38 years later, aged 80, that pension has been paying out for more than a century—much longer than herhusband had work to earn it…All this means that althoughBrazil is a young country, it spends on pensions like an old,

profligate southern European one. Currently it has only 11 people aged 65 and older for every 100 aged 15-64. Theratio in Greece is 29 to 100. But Brazil already spends11.3% of GDP on public pensions, not much less thanGreece at 11.9%” (Grounded, The Economist p.12).

The appeal of survivor benefits and thus an elderly romantic partner is so well known that it has brought about the term“the Viagra Effect” as a lighthearted term for popular high-age-difference couples.

Inflation

With presidential elections in October 2014, it is unlikely that the Rousseff administration will seriously focus onameliorating the general problem of growing fiscal vulnerability. Repeated violations of the primary surplus target may lead to increasing investor skepticism on the abilityof the government to maintain a sound budgetary framework.This may lead to downward pressure on the real due to capital

> The appeal of survivor

benefits and thus an elderly

romantic partner is so well

known that it has brought

about the term “the Viagra

Effect” as a lighthearted term

for popular high-age-difference

couples.

> Brazil’s unique structural

problems extend to anincreasing lack of fiscal

flexibility.




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Infla%on'IPCA'

Chart: RCS InvestmentsSource: IBGE

outflows. In addition to high taxes and tariffs pushing upcosts, infrastructure bottlenecks, and a tight labor market pressuring wages, Brazil contends with a high exchange-rate pass through, which is a percentage measure of the change in

import prices from a 1% percentage change in the exchangerate between two trading countries. At an “abnormally high”rate of 20%, according to Eduardo Levy-Yeyati, director of consultancy Elypsis Partners and a former chief economist at Argentina’s central bank, a depreciating real has a significantchance of exacerbating an already high rate of inflation, a thirdmajor impediment for long-term growth in Brazil. Highinflation rates are forcing the central bank of Brazil to raiseinterest rates at a time of sluggish economic growth; the Selic target rate was recently increased half a point to 9.5%. Higherinterest rates may act as a headwind for consumption and

investment as the cost of money increases, further oppressingeconomic growth.

Total Factor Productivity

The nation-wide protests this summer served as a wake-upcall for politicians regarding the adverse effects weighing on total factor productivity1. “In the past two decades ‘total factor’ productivity…has fallen in Brazil but grown in most othercountries… That suggests Brazil missed out on gains othercountries saw from investments in both human and physicalcapital, or that other improvements that generally come with

such investments somehow failed to materialize” (Grounded,The Economist p.7). The reason for this occurrence stemsfrom an exceptionally ineffective and burdensome government. An example: the nation spends 5.7% of its GDP towardseducation, an amount greater than the OECD average of 5.5%,according to the latest available data from the World Bank.

1In this report, it is assumed that the development of human capital falls within the realm of total factor productivity, counter to expanded versions of the neo-classical growth model, which assume that human capital is a direct component of the labor stock.

> The nation-wide protests

this summer served as a

wake-up call for politicians

regarding the adverse effects

weighing on total factor

productivity.




Y Yet, according to The Economist: “That should be enough to

give it good schools, but it doesn’t… Half of all 15-year-oldsare unable to interpret or draw conclusions from any but thesimplest texts. Two-thirds can manage no more than basicarithmetic. In literacy, mathematics and science alike, only 1%rank as high performers; across the OECD, 9% do”(Grounded, The Economist p.7). It turns out that the bulk of the funds goes towards university study, where only a small portion of the youth population benefit. This privileged cohortgenerally comprises of students from wealthy families able toafford the high costs of private schooling. An education that benefits only a small portion of the population does not

maximize the development of human capital and is not a good policy to substantially increase total factor productivity over the longer-term. Another example is the labyrinth of government red tape an entrepreneur needs to navigate to opena business and for investors to redeem recoverable capital froma failed investment. In both categories, Brazil ranks in the 35 th and 22nd percentile respectively out of 188 countries in the 2013Doing Business report. Starting a business takes an average of 119 days, again roughly a third of the year, while settlinginsolvency takes an eternal 4 years and for only an meanrecovery rate of 15.9 cents on the dollar, roughly half the

LATAM/Caribbean average of 31%. (Doing Business report, p152). Burdensome policy, which restricts commerce,consequentially leads to diminished productivity from theinputs of labor and capital.

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Educa&on)Spending)as)a)%)of)GDP)5)Latest)available)Data)

Source: World Bank and UNDP Chart: RCS Investments

> Starting a business takes an

average of 119 days, again

roughly a third of the year,

while settling insolvency takes

an eternal 4 years and for

only an mean recovery rateof 15.9 cents on the dollar,

roughly half the LATAM/

Caribbean average of 31%.




Inefficient Government

Many of the aforementioned factors: elevated taxes and aconvoluted tax system, lack of infrastructure spending, lavish pensions, high tariffs, and a regressive education system bring to light the importance of having a more efficient government.The summer remonstrations demonstrate how the current statemodel is no longer matching the demands of an emergingmiddle-class. With a tax burden almost double that of theLatin American region and a keen tax authority, termed “TheLion” partly due to its aggressiveness in ensuring collection,society is indeed contributing its part to the state; however, thestate has not given much in return. The cocktail of anovercrowded public transportation system with proposedincreases in bus fares was the initial spark that set in motionnationwide protests this past summer. This initial grievance,

however, is a symptom of the bigger problem of thegovernment’s lack of proper prioritization, exemplified byopulent expenditure on sports stadiums in preparation for the World Cup instead of less myopic government outlays focusedon improving the quality of education, health, and transportation for the middle class.

Future Development

Brazil can no longer exclusively depend on the principal

factors, a sustained and fundamentally healthy growth in globaldemand and ever-rising commodity prices, for its ascent onto the global economic stage in the past decade. The globaleconomy remains in the midst of a historic transformation, which I call the “Great Global Economic Restructuring.” Since the 2008 financial crisis, worldwide growth has occurred onincreasingly shaky foundations. No longer can the U.S.consumer act as the primary impetus for global growth as it didfor almost 5 decades. China and other large surplus countriesmust work to reassemble their economic growth platforms towards higher consumption. This ongoing period of transformation will result in feeble and vulnerable internationalgrowth. The U.S. economic recovery since 2009 has been the weakest in the post-World War II era, while China continuesits dependence on an unsustainable growth model of exceptional fixed asset investment and credit growth for state-owned enterprises. In general, external conditions are unlikely to provide the strong tailwinds for Brazilian growth as they

> The summer remonstrations

demonstrate how the current

state model is no longermatching the demands of an

emerging middle-class.

> Brazil can no longer

exclusively depend on theprincipal factors, a sustained

and fundamentally healthy

growth in global demand and

ever-rising commodity prices,

for its ascent onto the global

economic stage in the past

decade.




had done in the past. Brazil will have to create the rightinternal conditions to drive growth.

Lack of infrastructure has resulted in production and transportation bottlenecks, which have lead to goods shortages, loss of trade opportunities, and increased inflation. Therepublic must expand investment in infrastructure both toincrease economic activity in the short-term as well as toenhance total factor productivity over the longer-term via theintroduction of more technologically advanced and efficientforms of capital. However it must do so in a more efficientmanner by introducing reforms to add clarity for businesses toinvest (a streamlined tax system and less red tape) and by bringing private business on board for infrastructure projects. While opponents may argue that augmented spending maystretch public finances; expenditure on infrastructure

investment would lead to an increase in total factor productivity, raising marginal returns of both labor and capital.These investments would enhance the economy’s growth potential and result in healthy long-term debt/incomedynamics.

Furthermore, the nation must open its economy further toglobal trade and cooperation. A cozy business climate for protected firms leads to lack of innovation, inefficiency, andincreased costs. Indeed government should research how lessintervention has led to its prominent agriculture industry.

From The Economist in 2010:“In less than 30 years Brazil has turned itself from a foodimporter into one of the world's great breadbaskets… Theincrease in Brazil's farm production has been stunning.Between 1996 and 2006 the total value of the country'scrops rose from 23 billion reais ($23 billion) to 108 billionreais, or 365%. Brazil increased its beef exports tenfold in adecade, overtaking Australia as the world's largestexporter. It has the world's largest cattle herd after India's.It is also the world's largest exporter of poultry, sugar caneand ethanol. Since 1990 its soyabean output has risen from barely 15m tonnes to over 60m. Brazil accounts for about a third of world soyabean exports, second only to America.In 1994 Brazil's soyabean exports were one-seventh of America's; now they are six-sevenths. Moreover, Brazilsupplies a quarter of the world's soyabean trade on just 6%of the country's arable land… No less astonishingly, Brazilhas done all this without much government subsidy. According to the Organisation for Economic Co-operation

> The republic must expand

investment in infrastructure.

However it must do so in a

more efficient manner by

introducing reforms to add

clarity for businesses to invest

(a streamlined tax system and

less red tape) and by bringing

private business on board for

infrastructure projects.

> The nation must open its

economy further to global

trade and cooperation.




and Development (OECD), state support accounted for5.7% of total farm income in Brazil during 2005-07. Thatcompares with 12% in America, 26% for the OECDaverage and 29% in the European Union.

To be sure, this miracle of growth in the industry started withgovernment support with the creation of Embrapa, thecountry’s agricultural research corporation. But it isimperative for innovation resulting productivity growth that the government opens the country to more competition andinternational cooperation.

Brazil’s flaws are clear. Commodity prices have been volatile; global growth has been weak and inconsistent. Brazilcan no longer depend on these factors for growth. A closer look reveals that internal conditions are progressively

becoming Brazil’s main economic foe. Ironically this is goodnews as the country is increasingly in a position to take controlof its destiny. What is needed is decisive leadership andeffective solutions to the long-term problems plaguing thecountry. Short-term stimulus measures and even supply-sidemeasures such as reduced taxes have clearly not stimulated theeconomy. Brazil must invest in its own future.

> Brazil’s flaws are clear.

Internal conditions are

progressively becoming itsmain economic foe. Brazil

must invest in its own future.




References:

1. Blouet, Brian and Blouet, Olwyn; Latin America and the Caribbean: A Systematic andRegional Survey; USA; John Wiley & Sons, Inc. 2010

2. Colistete, Renato, Department of Economics, Universidade de São Paulo – USP;Revisiting Import-Substituting Industrialization in Brazil: Productivity Growth andTechnological Learning in the Post-War Years; March 2009

3. Central Brazilian government website: Invest section: Timeline of the Brazilianeconomy:

a. http://www.brasil.gov.br/para/invest/timeline-of-the-brazilian-economy/view_sumario_contatos?b_start:int=15&-C =

4. The decoupling debate; The Economist; 2008

a. http://www.economist.com/node/10809267

5. Grounded: Special Report on Brazil; The Economist; September 28, 2013 print edition

6. Cremaq, Piauí; The miracle of the cerrado; The Economist; August 28, 2010 printedition

7. World Bank, International Finance Corporation; Doing Business 2013 – 10 th edition;

8. World Economic Forum; The Global Competiveness Report – 2012-2013;

9. World Bank Data

rcs investments: brazil special report

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