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... X-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 de index 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 1960 s, 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 1970 s as an economic miracle among developing countries. Bibliography "Another Devaluation, Few Tremors. " Business Week, (1995), 28. Areas, Miguel.
Brazil: The People and the Power. Middlesex: Penguin Books Ltd. , 1972. Doing Business in Brazil. 6 th ed. USA: Price Waterhouse, 1994. "Happy Birthday, " The Economist, v. 336 (1995), 36. Mccluskey, Ian. "Magic Rio-ism. " Time, 146, no. 24 (1995), 16. "Staking Claims. " Time, 146, no. 25 (1995), 33. Roger, Luis.
Hierarchy and Trust in Modern Mexico and Brazil. New York: Praeger, 1990. "Survey: Brazil, " The Economist, v. 335 (1995). "Tax Reform and the Governors, " The Economist, v. 336 (1995), 39 - 40. Teixeira, A. S. "The Changing Role of Education in Brazilian Society. " In Modern Brazil, 71 - 95.
John Saunders ed. Florida: University of Florida Press, 1971. "The Fiscal Black Hole of Sao Paulo, and others, " The Economist, v. 338 (1996), 41 - 42. Trade Policy Review: Brazil. Geneva: GATT, 1993. "Urban Crime: from Rio... , " The Economist, v. 337 (1995), 37. "Watch my hands, " The Economist, v. 337 (1995), 33 - 34.
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Research essay sample on Sao Paulo Foreign Currency
