Another Brazil Essay, Research Paper

Brazil: National Context Geography Brazil occupies almost

one-half of the entire South America continent, and is the

fifth largest country in the world. It borders all Latin

American countries except Chile and Ecuador. The

9,170km coastline and the 50,000km navigable inland

waterways provide great potentials for water transportation

which has not been well developed. Brazil is topographically

relatively flat. 40% of the land is under the Amazon Rain

Forest. Most of the arable land is found in the South, but the

process of land development for agriculture is pushing into

the Central-West and the North as well. The climate is

mainly tropical and sub-tropical, and is particularly humid

and rainy in the Amazon region and along the coast.

Temperate climate is found in the south and on the higher

lands. The nation is free from earthquakes, hurricanes and

cyclones, but rainstorms, drought and frost occasionally

cause considerable damage. Demography and Social

Patterns Population is around 155 million and growing at

about 2% per year. It is concentrated in the southern states

of Minas Gerais, Sao Paulo, and Parana. Almost 60% of the

total population live on 20% of the land.(See Table 1) 80%

of the population is urban and 20% are rural dwellers. 55%

is under 20 years of age and less than 10% is over 60. The

average life expectancy is 63 years old. The majority of

Brazilians are of European or African descent. Besides the

original Portuguese settlers, other significant ethnic groups

include Africans, Germans, Italians, and Japanese. The

official language is Portuguese, but English is widely used in

the business community. The predominant religion is Roman

Catholicism. There is religious freedom, and religion is not a

source of social unrest. The general level of education

requires much improvement. About 75% of children above

ten years old are considered to be literate. Around 5% of

enrolled students go on to higher education. As a result,

most of the labor force are semiskilled or unskilled. There is

a shortage of managerial, supervisory, and technical

personnel. Living Standards The gross domestic

product(GDP) per capita in 1993 was about US$3,000 per

annum. There exists a wide income gap, with ‘1% of

population stinking rich, 20% stinking poor’. 10 million

families are roofless, while the 12 million homeless peasants

seek shelters in peasant squatters in the countryside where

land is so unequally distributed. Substantial funding are

needed for public housing, health care, schools, and

infrastructure. Other major social problems include violent

crime and corruption. Resources Brazil is rich in natural

resources. It has some of the largest iron ore deposits in the

world and is now one of the biggest gold producers. Other

metals and minerals are also mined on an increasing

scale.(See Table 2) The extensive river system provides

great hydroelectric potential, as evident in the Itaipu dam

project. Since the oil crisis in the 70s, Brazil embarked upon

the ProAlcohol program for alcohol fuel manufacture from

sugar cane to reduce the country’s reliance on foreign oil. As

for agriculture, Brazil is a major exporter of soybeans and

orange juice in addition to the traditional coffee and cocoa.

The fishing potential along the coastline is significant but has

not been fully exploited.(See Table 3) The natural scenery

and favorable climate also foster a prosperous tourist

industry. Political Climate and Forces Brazil remained a

Portuguese colony for more than 300 years until it became a

republic(Federative Republic of Brazil)in 1889. The latest

Constitution was promulgated in 1988, and it is still under

review. Brazil is composed of 27 states and the Federal

District of Brasilia, the capital city. The states are divided

into municipalities, which are further divided into districts.

The federal government consists of three branches: the

executive, the legislature, and the judiciary. The executive

branch is headed by the President under whom are several

executive departments and independent regulatory agencies.

The appointed heads of the executive departments form the

Cabinet. The legislative branch, the Congress is made up of

the elected Senate and the House of Representatives. The

judicial branch consists of a system of federal, state, and

local courts throughout the country, headed by the Supreme

Court. There are many political parties, but ideologies are

not well developed as a democratic system returned only in

1985. Parties normally represent specific economic groups

and interests within the country. After the industrialization

resulting in fierce inflation and foreign debt, Brazil went

through a period of military autocratic regime through 1964

to 1989, until the first popularly elected president since

1960, Fernado Collor de Mello. Although the chance of the

military having a coup is slim, they still remain a strong

political force. President Collor had significant support and

vowed on reform on the much needed economic policy. He

planned to lower tariffs, control inflation, promote free trade,

and reduce the over bloated public sector. However, he

resigned in 1992 for charges of corruption. His successor,

former vice-president Itamar Franco was seen as indecisive

in economic matters. He chose to make increasing growth as

his first priority instead of reducing inflation. Despite of a

already huge deficit, he tried to stimulate growth by

increasing government spending. The current president,

Fernardo Henrique Cardoso was Franco’s finance minister.

He pushed through a stabilization program which included

significant economic liberalization and income tax increase.

He managed to lower inflation and federal deficit by

introducing the Real Plan. Now, he is pushing the

Constitution review which vows to privatize state-run

monopolies and redistribute tax revenues. Luis Inacio Da

Silva(Lula), leader of the Workers Party(PT) was the

second runner-up in the two most recent presidential

elections. His socialist philosophy stresses social justice,

restraints on market capitalism, limits to integration with the

world economy, debt relief, and a larger state role. He

represents the left wing of the Brazilian politics which is

growing in importance. Meanwhile, pressed by the public

outcry for better public services, President Cardoso

announced that of his $500 billion planned spending for

1996-99, two-thirds would be embarked for social services

such as education and housing. However, Mr. Cardoso

disappointed western observers by allocating two-thirds of

the social spending to welfare payments. Since 71% of the

population is Roman Catholic, the Brazilian Church has

traditionally had great influence in the political scene. In

recent years, Vatican has strengthened controls over the

Church, making it more conservative. However, the Church

still remains a left-of-center social action wing which excises

influence on voting results. The Brazilian Church is closely

related to the poorer and express sympathies for the PT.

With the return of democratic election, the recent political

turmoil seems to be ended. However, President Cardoso

would still have to face an over represented Congress from

the poorer northern regions, and one who greatly hinders the

progress of the Constitution Amendments on behalf of their

protégés-local business and powerful. However, given the

first-year success of the real, President Cardoso should have

more power in advancing his economic reform. Economic

Growth Brazil is the tenth largest economy in the world. Its

economy grew considerably from the mid-1960s to the end

of the 1970s. However, during the 1980s, economic

performance faltered; macro-economic instability, high

inflation, and increased indebtedness characterized the

decade.(See Table 4) Under the recent economic reform,

growth has been restored and inflation has been

reduced.(See Table 5) The major challenges facing Brazil

now is to maintain growth and control inflation, . National

Values and Ideology People Brazil is a very mixed and

culturally diverse country. Brazilians are viewed as

passionate, open, and patriotic especially when it comes to

soccer in the eyes of the western world. Throughout various

stages of the history, such as the struggle for independence,

for the Republic, and the recent parade against violence in

Rio de Janeiro, , the ideas of liberation and optimism are

always there in the background. However, they are also

conservative especially when related to religion. Like other

cultures in the tropical, Brazilians are leisure oriented. The

working day is normally eight hours, Monday to Friday.

Besides statutory holidays, the annual Carnival causes a

standstill to all businesses Monday through Wednesday.

Recreation activities are mainly outdoors, taking advantage

of the tropical climate. Society Though under a democratic

system, the society is still highly stratified with a small group

of business elite and landowners controlling the direction of

major policies. The Congress is dominated by whites. A

century after the abolition of slavery, blacks lack adequate

political representation, education, and housing. The basic

unit of society differs among different regions. Individualism

dominates in the highly industrialized South where people

enjoy a greater social mobility. In the rural northern regions,

however, fazenda-traditional large agricultural producing unit

is the basic social system. It is characterized by the dualistic

system, with the landlords at the top and everyone else at the

bottom. In the traditional agriculture based society, powerful

fazendeiro tended to extend their power into the political

system in order to control government policies. This is why

the present government is facing large resistance on land

reform from the North. The hierarchical relationship is also

closely linked to clientelism in which superiors grant certain

favors to inferiors, thereby creating indebtedness and moral

obligations while securing a steady supply of labor or scarce

skills. While in urban contexts with high rates of

unemployment, job opportunities are provided in exchange

for loyalty and backing in elections. Such concept of

‘extended family’ is the foundation of human relationship in

Brazil. National Strategy Institutional Framework The

Executive holds much of the responsibility for formulating

and implementing trade and industrial policies. The present

government has eliminated and simplified many regulations

dealing with specific trade and tax concessions that used to

be complicated. The complex investment code has also been

simplified and liberalized, though a few constraints still

remain. The main economy agency is the Ministry of

Economy, Finance, and Planning(MEFP) headed by Pedro

Malan. Under it the principal business regulatory agencies

include: BACEN-Central Bank(monetary policy, foreign

exchange controls, control of foreign capitals and profit

remittances, regulation of banks and financial institutions),

CVM-Securities Commission(securities markets and listed

companies), CADE-Administrative Council for Economic

Defense(monopoly, cartel, antitrust monitoring),

INPI-National Institute of Industrial Property(technological

development), CDI-Industrial Development

Council(industrial development, granting of fiscal incentives),

and DECEX-Foreign Trade Department(foreign trade,

control of export and import licenses). In the formulation of

economic policies, the government maintains contacts with

the private sector which may contribute in the process

through participating in sectoral chambers and special

committees. Also, reviews of policies are sometimes

provided by research institute. Economic Policy and

Challenges Until the recent reforms, the economy was

subject to extensive regulation which inhibited the operations

of a competitive market economy. Since 1990, Brazil has

undertaken a major liberalization effort concentrating on

trade liberalization, deregulation, and privatization. The

current economy is basically one of free enterprise, but there

is still considerable state and semi-state participation in

various strategic sectors. The National Privatization Program

was enacted a few years ago to privatize many formerly

state-run enterprises, most notably the steel and

petro-chemical industries. In July 1995, the lower house of

Congress has accepted the Constitutional Amendments that

will open oil, mining, electric power, and telecoms to private

and foreign investment. One of the largest successes of the

recent reform is the real, Brazil’s latest currency. Introduced

to deindex prices and to lower inflation, the real and

accompanying measures have brought fierce growth and a

flood of new investment: 12 multinationals alone are planning

to spend $8 billion by 2000. Most significantly, inflation has

fallen, from 3000% in 1989 to 30% in 95. However, the

strength of the currency encouraged imports and Brazil is

facing a trade deficit: $3.2 billion in 1995. The government

responded by devaluation, import curbs, tariffs, and quotas

on car imports. Another problem is the coming back of

inflation. However, inflation seems to be built in the system

characterized by private greed, lack and mismanagement of

public finance and enterprise. Urgent reforms are needed in

the following: the rusty and unwieldy tax system collection

and distribution of tax revenues-empowerment of the federal

redistribution of public responsibilities between the federal

and the states reduction of foreign debt ending the

job-for-life security of public servants replace poorly run

state pension program with private project privatize and

monitor estado(state) banks, stop the chaotic and

unsupervised lending to the states open joint ventures or

private investment in the remaining state-run enterprises

remove restriction on foreign ownership General Trade

Pattern Natural resources and agriculture have been the

traditional mainstay of the Brazilian economy, backed up by

abundant human resources. This is mainly a result of the

colonial monarchy for which the infrastructure was built to

provide resources for the mother country’s industries. Since

the 1960s, however, emphasis has been shifted to industrial

development financed mainly by international loans. As a

result, exports today reflect a much more balanced mix of

commodities and manufactured goods.(See Table 6)

Following the debt crisis of 1982, the servicing of Brazil’s

foreign debt required the creation of large trade surpluses.

This was achieved by import contraction. Between 1982

and 1990 the value of imports fell from 7% to 4% of

GDP.(See Table 4) With the lowering of trade barriers, the

profile is changing. A free trade zone was also set up in

Manaus in the North to attract business to the Amazon.

Leading trading partners are the European Communities, the

United States, Japan, and Argentina. During the past

decade, the direction of exports has shifted towards the

United States and developing countries, particularly in East

Asia. The share of Latin American countries has declined

from 18% to around 12%, reflecting unstable economic

conditions in those markets.(See Table 7) Imports are also

mainly from the United States and Europe. Within Latin

America, MERCOSUL countries and Chile are the main

suppliers.(See Table 8) Brazil is a member of the Latin

American Integration Association(LAIA), and a founding

member of the General Agreement on Tariffs and

Trade(GATT). Special tariff preferences are granted to

imports from members of the LAIA and the Global System

of Trade Preferences among developing countries(GSTP). It

is also a member of the Southern Common

Market(MERCOSUL), an agreement among Brazil,

Argentina, Paraguay, and Uruguay aiming to gradually

eliminate all tariffs in 1995. There is also a Brazil-Argentina

bilateral agreement that would increase trade between the

two nations. The success of these regional agreements may

increase the chance of a future common external tariff.

Foreign Investment The Constitution establishes that foreign

investments should be in the national interest, and it is

welcome to the extent that it represents a long-term

commitment to the economic development. Areas

particularly favored by the local include development of

agriculture, technology, labour-intensive industries, and

manufacture of products that are currently imported and

those that will increase exports. Foreign investors may also

participate in the National Privatization Program by

converting Brazilian foreign debt securities, or by subscribing

to the privatization funds. Although there are no federal tax

incentives to attract foreign capital, many states and local

government offer tax concessions especially in the poorer

Northeast and Amazon regions. Except for the above tax

incentives, all corporations are subject to 26% corporation

income tax. There is a strong control over foreign currency

transaction which is monitored by the National Monetary

Council. All foreign currency loans have to be approved by

the Central Bank. When Brazil is short of foreign exchange,

the Central Bank centralizes all foreign currency repatriation

and remittance requests, and releases foreign currency when

it becomes available. Therefore delays occur, though the

Bank pay interest compensations. Foreign ownership is

restricted in certain industries viewed as strategically

important. These include communications, aviation, defense,

classified government contracts, coastal and freshwater

shipping, financial institutions, and privatized companies.

Other than these, foreign firms are generally allowed to have

100% ownership. Under the Constitution, national capital

companies may also receive temporary market protection or

benefits in activities considered to be important or national

development. There is limitation on rural land but no

restriction on ownership of urban land and buildings.

Security markets are available with the principal stock

exchanges in Sao Paulo and Rio de Janeiro. All public issues

of securities have to be registered with the Securities

Commission(CVM) The process of registration can be very

time-consuming. Banking and financing business are

regulated by the Central Bank. Major banks in the private

sector have been organized into financial conglomerates, and

are able to offer full range of financial services through

subsidiary and associated companies. A point to note is that

Brazil is not an international financial center and offshore

banking, trust, and financial services are not allowed.

Imports have been generally subject to high tariffs but are

starting to fall. The maximum import duty rate would be

reduced to 40% by the end of 1994, and the modal rate was

projected at 20%. Import procedures were also

deregulated. Besides the 26% corporate tax, a 15% tax is

also charged on dividends. Although a corporation can be

wholly foreign-owned, participation of local capital is

favored by authorities. The director of the corporation must

hold a permanent visa and be domiciled in Brazil, though

nationality is not a restriction. The labor force is

approximately 62 million, or 41% of the population. Women

comprise 35% of the total, and this percentage is projected

to increase. All employers, with few exceptions are required

to employ Brazilians in the proportion of at least two-thirds

of their total personnel as regards both number and total

remuneration. There is a minimum wage requirement and

labor unions have become more active especially after the

national two day strike in 1989. Patent and trademark laws

are available on a federal level. Environmental awareness has

increased due to international pressure, especially from the

US. This has restricted the exploitation of the tropical rain

forest. The infrastructure is underdeveloped. There has been

no major modernization or improvement of the

government-controlled railroad system, though there are

plans for some extensions. Hence road transport dominates,

but highways are not well maintained and construction of

new highways has been slow in recent years. The airline

network is well developed and mainly privately owned.

Urban transportation poses significant problems especially in

major cities. The postal system is well developed. The

telecommunication system has made significant progress, but

is now lack of further investment. Telexes and electronic mail

links are widely used by business and industry. Canadian

Firms in Brazil For Canadian businesses, Brazil offers great

opportunities for its vast consumer base, close proximity,

and its similarities in language and culture. With the current

government’s commitment on economic liberalization, the

investment climate is favorable. Interested firms should be

prepared to commit a medium to long term investment

subject to tight exchange control. Government policy may be

unstable. Precautions should be taken when dealing with

local government due to the cumbersome and corrupt

bureaucracy. Connections with the political scene is

advisable. Also, Brazil has much more primitive financial and

industrial base, and a much lower standard of labor

productivity. Employee training would be a substantial part

of investment. Canadian industries can take advantage of the

large labor base for labor intensive manufacturing processes

like textile and electronics. There is also large potential in the

agriculture, fisheries, and energy sectors. The huge

population, combined with those of the MERCOSUL

countries will form a gigantic consumer base for almost any

product. As inflation and foreign debt under control, Brazil

might fulfill the promises it gave in the 1970s as an economic

miracle among developing countries. Bibliography "Another

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Arraes, Miguel. Brazil: The People and the Power.

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