Brazil’s Enigma:

Sustaining Long-Term
Growth PRESENTATION BY:

1. ABHINAV NARAYAN - G013

2. SONAL BAJORIYA - G043
3. SHUBHANGI GUPTA - G003
4.TANVI MAHESHWARI
5. ANOSH MODY – E031
6. PRAKHAR –A008
Summary/ Overview

GDP growth from 2003 to 2008.

01 Growth declined due to the global financial crisis.
Quick recovery by mid- 2009.

02 Attracted foreign investors.

Moved up to BBB+ rating.

Economy was beginning to suffer.

03 The GDP had grown by 7.5%, but the economy
remained stagnant at about 2%.
Challenges

DEVALUATION OF CURRENCY
01
Not supported by structural reforms.
Lowering of productivity in long run.
Pushed out foreign investors.
Increased Foreign Investment
02
Pushed interest rates up.
Increasing pressure on the currency.
Capital controls set by imposing a tax.
Political Crisis
03
Corruption in government.
President impeached.

Brazilian Cost
04
Poor infrastructure, high tax burden and inefficient taxation
system, high interest rates, and undeveloped educational
system.
Brazil during the
2000s
Brazilian Economy : Before 2000s
Late 1930s to Early 1980s: ISI Development Strategy

⮚Substitution of foreign imports with domestically produced

goods
⮚Tariffs were raised, and the exchange rate was fixed

Early 1980s to 1994: Period of Hyperinflation

⮚Hyperinflation started in 1980s and peaked around 1994

where it increased at an annual rate of 2100 percent
⮚ Wages were linked to inflation
⮚ Each President came with a plan but failed
⮚ From 1988 to 1994, it also underwent a Trade liberalization
scheme due to which Tariff rates dropped
⮚The plan finally worked in 1994 when ‘Real’ , the currency
was introduced that survives till today
⮚ In 1991, Brazil also entered a Free Trade Agreement with
Argentina, Paraguay and Uruguay which together make up
Mercosur
⮚ In 1995, Brazil became a member of World Trade
Organization (WTO)
The Lula Years
From 2003 to 2009
Decline in Poverty Rates from Children of 12.4 million families
21% of the population to 11% educated under Bolsa familia Program

Unemployment rate dropped However, top 20% held 58.6% of

from 12.3% in 2003 to 7.9% in Nation’s wealth while lowest 20% held
2008 and income inequality only 2.9%
decreased by 6%

Financial Crisis: Dec 2008 to Mar 2009

Weakening Commodity prices

and Credit shortages

21% decline in Industrial

Production
Commodity Boom
Exports and Imports Summary
(Source: World Bank)
Year Exports Imports
⮚ Commodity boom occurred in Brazil in 2000s mainly
2000 Total value $55,119 million $55,851 million
due to exports, emerging middle class and a stable
Top Partners US, Argentina, US, Argentina, Germany, macroeconomic environment
Netherlands, Germany, Japan, Italy
Japan
⮚ In 2008, Brazil became a member of G20
Top Products Soya beans, Non- Petroleum oils, Monolithic
agglomerated iron ores integrated circuits, ⮚In 2009, it became World’s best exporter of Iron Ore
and concentrates, Oil-cake common wheat, meslin
and other solid residue of and second-biggest exporter of soybeans
soya-bean, coffee
⮚ In 2010, export structure changed from manufactured
2010 Total value $201,915 million $181,768 million
goods to primary goods
Top Partners China, US, Argentina, US, China, Argentina,
Netherlands, Germany Germany, Korea ⮚China became the main trading partner
Top Products Non-agglomerated iron Automobiles, Monolithic
ores and concentrates, integrated circuits
Petroleum oils, Soya
beans, Raw cane sugar,
Agglomerated iron ores
and concentrates 7.5%
Growth in GDP
Custo Brasil
High Cost of Conducting Business in Brazil
Ease of doing business
Russian South
Parameters Brazil India China Federation Africa
Global Rank 124 63 31 28 84 Lowest rank among BRICS in 6 out
Starting a business 138 136 27 40 139 of 10 parameters
Dealing with
construction permits 170 27 33 26 98
Getting electricity 98 22 12 7 114
Registering property 133 154 28 12 108
Getting credit 104 25 80 25 80
Protecting minority
investors 61 13 28 72 13 Cost of Brazil can be broadly attributed to-
Paying taxes 184 115 105 58 54 • Lack of infrastructure
Trading across • High taxation
borders 108 68 56 99 145 • Excessive Financing Costs
Enforcing contracts 58 163 5 21 102
Resolving insolvency 77 52 51 57 68
Lack of Infrastructure
Components of government spending as % of GDP
Gross fixed capital formation (% of GDP)
50 10
45
9
40
8
35
7
30
25 6
20 5
15 4
10 3
5 2
0 1
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 0
19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 1997 (% GDP) 2002 (% GDP) 2010 (% GDP) 2015 (% GDP)

Brazil China India Payroll Income Transfer to Households Pension Benefits

Russian Federation South Africa Investments Fixed Gross Capital Formation

Fixed capital formation stood at 18%, compared to 47% Starting in 1988, the constitution guarantees free
of GDP in China, 28% in India and 22% in Russia education and healthcare, which has increased
government spending on welfare
Lack of Infrastructure

Infrastructure spending as % of GDP, Road Density by squared area Railroad length by land area
2000-2013
Lack of Infrastructure
Highly regulated labour relations, requiring companies to
provide extensive benefits to full-time employees, which
leads to high labour costs

Enrolment in higher education is low, leading to a shortage

of skilled workers. As a result, companies have to increase
wages to attract talent. Hiring of unqualified workers also
leads to lower productivity

Quality of education remains a problem. Despite some

recent reforms at the university levels, they fail to
address local issues at school and college level
High Taxation
• High government expenditure on welfare Total tax and contribution rate (% of profit)
80

• To fund its welfare schemes, the government 70

has increased taxes 60

50
• Tax burden at 35% of GDP compared to 25%
in US, 25% in South Korea, 18% in Mexico 40

and 17% in China. 30

20

• Tax and contribution rate highest in Brazil 10

among all BRICS nations 0

2013 2014 2015 2016 2017 2018 2019

• High minimum wages and high taxes don’t Brazil

Russian Federation
China
South Africa
India

leave enough to invest in upgrading and

buying new machineries for manufacturing,
leading to further decrease in productivity
Excessive Financing Cost
100 Lending Interest Rate
90 Government has used interest rate to control
80 inflation, but high interest rates have increased the
70
cost of capital for companies
60
50
40
30 High interest rates are attractive for foreign investors,
20 but the investments have been in financial accounts,
10 not towards the creation of physical assets
0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 014 015 016 017 018 019 020
19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 90% 2 2 2 2 2 2 2
Brazil China India Russian Federation South Africa
80% Brazilian Development Bank (BNDES), though
gives loans at a subsidised rate was criticized
Real Interest Rate for lending too much to large corporations.
60%
100 Accused of having too much political clout
80
50%

60 Ranked 76 out of 167 countries on how the

40 public sector is perceived
20

0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
-20 High interest rates increase the cost of business,
-40
appreciates the local currency, making exports
costlier
Brazil China India
Russian Federation South Africa
Cost of Brazil
High cost of capital

High interest rates

(to control inflation) Currency appreciation
making exports
costlier
Low capital left to Low growth in
High Taxes invest in upgrading manufacturing sector and
(to fund welfare) existing factories development of local
businesses
Poor quality of roads
and rail networks

Strict labour laws

Lack of infrastructure
increases wages

Poor quality of
education decreases
productivity
The Boom and the Exchange Rate
Lula President IOF tax Finance Minister Mantega

Socialist- fears of election Curb inflation and control Real- one of strongest currency.
increased risk premium to transaction tax of 1.5% on Currency wars making Brazil
23% and stock market fell incoming FDI. Global lose competitiveness. IOF
to 4.6% recession- Investments raised to 4% and then 6% to
halved and IOF removed control FDI.

2004 2008
2002 2009 2010
-07

Increased FDI Reintroduction on IOF

Inflows US$ 79.5 bn Economy recovered,

Inflation, upward pressure, reintroduced IOF at 2%
with addition to Portfolio
By 2008- R$1.6 per US and equity investments
dollar. Currency
appreciation weakening
competitiveness
Election of Dilma Rousseff
People speculated her to be Lula’s proxy Lula’s term limit. Rousseff Bulgarian
Entrepreneur’s daughter. Chosen for presidential
election

Rousseff won election against Jose Serra to Traditional Background, left wing.
become first female president Chief of staff for 2 years to Lula. Short tempered
called “the iron lady”

Mixed reaction: People feared greater state Promised reduced interest rates, improve
involvement. Fears of private investments being productivity, attract investments. Lighten tax
crowded out burden, improve quality of public spending, curb
inflation
 Reviving Productivity
Growth Acceleration
Program & Exchange Large Stimulus Plan
Rate focus

2012 2013
2010 2011 2012
(2) 2013
)

Start of Rousseff Crackdown on Persistent Inflation

Presidency corruption and
monetary policy
intervention
Backdrop:
⮚ Increasing unit labour cost

⮚ Slowing growth in industrial production

⮚ Poor existing infrastructure: hindering competitiveness

⮚ Ideology: Role of industrial sector is absolutely essential

e
er
for development: old-school thought

H
nt
te
on
C
e
er
H Implications:
nt
te
on
C

⮚ Relative cost of producing in Brazil shot up

⮚ It became cheaper to import than to procure locally

⮚ For perspective: Steel produced in Korea from

Brazilian iron-ore was cheaper than steel produced in
Brazil
 Growth Acceleration Program
Exchange Rate

Bigger Brazil
Persistent Inflation
Stimulus
Package

Stimulus & Privatization Criticism

 DILMA 2.0
ECONOMIC RECESSION
MILLION DOLLAR PETROBRAS • Inflation – 6.7%
CORRUPTION • Capital Investment - -5%
• Weakened Currency to R2.6 / $
• Current Account Deficit - 3.7% of GDP

International Economic Challenges

• International investors were skittish
• Commodity prices plunged Political Changes
• Concerns of Chinese slowing
brazil’s growth

Economic Difficulties 2015

• Inflation double digits
• Govt debt escalated Popularity Tumble for Dilma
• Increase in Selic rate
• S&P Downgrade
IMPEACHMENT & TEMER REIGN

5.Corruption Problem
1. ALLEGED POLITICAL COUP • 15/26 Appointees faced criminal investigations
• Multiple Corruption Allegations

4. REDUCE GOVERNMENT HAND IN ECONOMY

Content • Project Growth

• Privatization of Oil Fields
2. CHANGES BY TEMER
• Steps taken contributed to reducing
• Cabinet Revamp inflation
• Introduction of reforms

3. Social Security Reforms

• 40% of government spending on Social Security, Pension Payout was 12& of GDP
• Changes in labor legislations
• Changes in Tax Structure
Recent Social Security Spending Trends in Brazil
WAY FORWARD

Revive brazil’s growth and instate

governmental discipline.

What should be done to achieve a stable

economic growth.

What additional actions should be taken to

encourage competitiveness. TASKS AT HAND
Path towards sustained growth.