Canuto and Schellekens’ “Three Perspectives on Brazilian Growth Pessimism”

By Otaviano Canuto and Philip Schellekens

World Bank: Economic Premise

June 2014. Number 148.

Abstract:

Over the last few years, Brazil’s growth has significantly decelerated. Accompanying this slowdown, a change in commentary on Brazil’s economic future has emerged, and is reflected in a recent ratings downgrade of Brazilian sovereign paper and an overall much-bleaker growth outlook both for the near and medium term. This note examines three contributing factors to this change in sentiment: macroeconomic management, the external environment, and microeconomic fundamentals. Among these, this note argues that the relative lack of progress on the microeconomic reform agenda has been far more detrimental to the growth outlook than either the credibility cost of recent macroeconomic management or the negative influence of a less supportive external environment. Against this backdrop, the recent ratings downgrade is not inherently negative: while Brazil is not about to slide down a slippery slope of macroeconomic mismanagement or on the verge of an externally powered economic meltdown, the downgrade can serve as a call to action for government to enact the necessary structural reforms to energize and sustain productivity growth.

Canuto and Schellekens take stock of the developing theses regarding Brazil’s recent return to sluggish growth. Accordingly they offer three lines of argument to explain the growing pessimism, including:

Macroeconomic policy credibility

“…recent macroeconomic management has eroded the hard-won credibility of a macroeconomic policy framework built on fiscal prudence, exchange rate flexibility, and inflation targeting. 

External support factors

“This view is intricately related to the hypothesis that the growth acceleration before the global financial crisis was largely the result of external rather than domestic factors. Rapid capital inflows, better terms of trade, and lower global interest rates all played to Brazil’s favor when times were good.”

Microeconomic growth fundamentals

“This strand is of far greater concern than the credibility cost of recent macroeconomic management or the economic impact of the deterioration in the external environment. Indeed, the microeconomic environment is critical for growth, even more so today than in the past. This is because demographic dynamics have reduced the growth of Brazil’s labor force. Higher growth therefore requires first and foremost increased worker productivity.”

Brazil productivity

Accordingly, Canuto and Philip Schellekens argue that

“…during the recent period of slower growth, little progress was made in tackling long-standing structural bottlenecks, and therefore the structural reform agenda remains long and unfinished (Canuto 2014; World Bank 2014). Unsurprisingly, slow growth has, for that reason, primarily become a supply-side phenomenon of a structural nature.”

This note provides a very concise frame of the major arguments explaining Brazil’s recent bout of slow growth, but also argues that government fiscal and monetary policies are not the prime cause, nor is the slowdown in worldwide demand for Brazilian commodity exports. Rather, these authors identify the supply side as the locus of the challenge and advocate structural reforms that invite greater productive investment and entrepreneurial behavior to raise productivity and expand economic activities in the face of a gradually shrinking labor force.

Clearly Brazil is underinvesting in future growth. Therefore we must focus on those primary reasons that curtail Brazilian private investment, shape the allocation of foreign direct investment, and stymy workforce productivity. Canuto and Schellekens argue that the solutions will be found in structural reforms that provide greater microeconomic incentives for investors. Yet, they fall short of providing a step-by-step reform agenda. Most observers agree with the need for reforms that lead to greater investment and productive innovation, but few have laid out a blueprint for taking this uncertain and politically divisive journey.

Any ideas?

Read the entire Economic Premise here.

 

 

Brazil’s Rise?

A BrazilWorks Review of:

Brazil’s Rise: Seeking Influence on Global Governance

Harold Trinkunas

Latin American Initiative

Foreign Policy-Brookings Institution

April 2014

 

Harold Trinkunas, Senior Fellow and Director, Foreign Policy and Latin America Initiative at the Brookings Institution, offers up a relevant, lucid analysis of Brazil and its contemporary foreign policy options with respect to global governance issues. For Trinkunas,

“Brazil stands at the crossroads in its road to major power status. It can either continue its ascent, or can remain a middle power, albeit a critical one, within the existing international status quo.”

Brazil’s future has always attracted a lot of attention by scholars, journalists, and foreign policymakers; but is particularly relevant in 2014 when Brazil hosts the FIFA Men’s Soccer Championship (the largest sporting event on earth) and carries out its presidential elections. Trinkunas breaks down his analysis into distinct questions about Brazil’s intentions, its capabilities, and opportunities to rise toward major power status. He does not treat in any detail what the international status quo is and its impact on Brazilian development, nor does he integrate parallel arguments regarding Brazil as a global swing state or its role in the “rise of the rest” thesis. Trinkunas does recognize that the United States’ “post-Cold War unilateral moment” is on the wane, but does not clearly explain how the current global balance of power shapes Brazil’s foreign policy choices or challenges.

Few doubt that Brazil’s global political influence has increased during the past two decades-partially the consequence of domestic policies that achieved growth, income redistribution, and stability along with former President Luiz Inácio Lula da Silva’s pronounced presidential diplomacy. Brazilian foreign policymakers do seek to change the world, rebalance the global balance of power, and reform international intergovernmental institutions of global and regional governance, but it is unclear whether their intentions are to climb the last rungs of the global power ladder or work to help pull up the rest. Even if Brazilian political leaders chose the former, does the country have sufficient capabilities and would the Brazilian electorate support such a strategy at the ballot box?

We can learn a lot from Trinkunas’ analysis, but his perspective on Brazilian efforts to exert global power relies on too many historical assumptions about Brazil’s motivations and how they serve to shape the nation’s foreign policy. He makes the claim that Brazil “sought admittance to great power status through allying with the leading powers of the system” following World War II (pp.9). Trinkunas correctly reports that important U.S. foreign policymakers, including President Roosevelt, sought to incorporate Brazil within a global party of liberal internationalism following the conclusion of WWII. Yet there is little evidence that such policymakers wanted to raise Brazil to the righteous rungs of the global power ladder. Rather, they understood Brazil as a major producer of raw materials, a consumer of U.S. exports, and an anti-communist battleground. Despite these reasons, U.S. foreign policymaking after WWII, as Trinkunas reports, frustrated Brazil by its utter lack of sensibility and commitment to the national development priorities of Brazilian democratic populism.

Certainly Brazilians of many political persuasions were disappointed with bilateral relations following Brazil’s alliance with the U.S. and direct military collaboration during the latter stages of WWII, but this does not prove that Brazilian policymakers were eager to obtain the regalia of global leadership and pay its compulsory costs. Rather, most Brazilian leaders, from Getúlio Vargas to Lula, were deeply focused on national economic development and willing to strike alliances with those in a position to assist the most. Despite differences in political tone and policy preferences, Brazilian leaders and political parties share a fundamental consensus on the importance of economic development and the key role of the state in leading the way.   Trinkunas also recognizes this feature of twentieth century Brazilian public policymaking, reporting that,

“The military also supported rapid economic development and pursued a largely peaceful foreign policy during its time in power, policy preferences shared by diplomatic and economic elites (pp. 11).”

As Trinkunas concludes, everyone wanted to foment Brazil’s “rise” and take credit for it. Yet, most Brazilian policymakers and leaders understood “rise” in the twentieth century as economic development commensurate with Brazil’s geographical size and natural resources, not so much scaling the rungs of global governance unless it was a pragmatic requirement for advancing national development. Even former President Lula, regarded for his assertive foreign policies, called for a

“new global economic and trade order [that] mirrors the country’s renewed self-confidence as a non-conformist power. It [Brazil] doesn’t seek simply to take up a place at the top table. Rather, it is confident in its strength as a consensus-builder within the South and bridge-builder to the North.”

Trinkunas fittingly recounts that Brazil’s geopolitical position does not rely on the bomb or other traditional dimensions of hard power associated with flying over the global power curve without stalling. His comparative analysis of Brazilian defense and military spending is convincing this way.  If Brazil is reaching for the top, it is not with offensive weapons. Moreover, he points out that Brazil’s foreign assistance budget and its willingness to “pay off” other states for political cooperation are limited. These empirical dimensions of foreign policy are very telling with respect to motivation and vision. If Brazil does not have much “skin in the game,” then how might one argue that it has repeatedly undertaken concerted efforts to become a major power?

Brazil Defense

One might argue, as Trinkunas does, that Brazil has faced recent opportunities to harness existing capabilities (mostly expressions of soft power to use Nye’s term) to make a move to rapidly increase its geopolitical influence. He points to Brazil’s “ascendency” in South America as well as the transition from the unipolar moment in U.S. hegemony following the fall of the Soviet Union to “greater multipolarity” over the past decade. However, he flips the argument around to suggest that Brazil’s failure to galvanize support around Latin America (Argentina and Mexico) for a permanent seat on the United Nations Security Council and the U.S. success in incorporating Mexico and Colombia into its geopolitical orbit despite its own decline indicates Brazilian failure to ascend.

This argument stands in contrast to Brazilian foreign ministry officials’ caution in asserting too much leadership in South America and around the LAC region. From all indications and political pronouncements, Brazilian leaders prefer to deepen strategic partnerships with Argentina and Mercosul while expanding alliances around the LAC region without imposing its own blueprint or stepping on toes. This foreign policy framework fits into Brazil’s multilateralist convictions and its own national interest in building consensus around reform of liberal international institutions of global governance that increase representation of the developing world, not Brazilian geopolitical power exclusively. This distinction is essential. For most Brazilian leaders under democratic rule, making global governance more representative is the most constructive avenue for advancing Brazilian national interests, most of which correspond to the economic and social development of the LAC region as well as Africa and other developing or low-income regions of the world.

Trinkunas correctly notes that Brazil’s multilateral efforts and initiatives are slow to develop and do not challenge Brazil’s capabilities or impose substantial costs. Rather than assume that such a relatively slow process is further evidence of Brazil’s failure to seize the moment to rise, another argument would tender that IIRSA, UNASUR, and CELAC are products of consensus building, albeit imperfect, but better suited to the historical convergence of LAC nations eager to cooperate among themselves as one more hedge against a global political economy that offers scarce opportunities to rapidly increase national wealth through participation in global production chains bent on efficiently extracting natural resources, trading agricultural and mineral commodities, exploiting relatively cheap industrial labor, and more recently, penetrating the region’s swelling consumer markets.

Brazilians are weary of their own inabilities to overcome national bottlenecks to further economic and social development, but few are blind to the very real limits placed on such development by international economic and political factors well beyond their control. Indeed, Brazilian foreign policy has emphasized the importance of addressing these limits through democratic reforms at the International Monetary Fund and better regulation of European and United States banks in recent years for obvious reasons. Moreover, Brazil’s trade policy agenda seeks market access concessions that would improve the developing world’s ability to respond to economic opportunities-largely in the face of U.S. political opposition-including ongoing violations of World Trade Organization agreements (such as the Cotton Dispute among others).

Brazil’s current capabilities and level of economic development are not fully determined by U.S. policy or the institutions of global governance, but there are observable, external limits to Brazil’s rise. If opportunities do exist for Brazil to join the club of super powers, the costs associated with overcoming these external obstacles may not be worth the benefits or be supported by a majority of Brazilians who continue to demand more focused policy attention on national economic development, including better public education and healthcare. During the coming decade it is more likely that elected leaders will opt for greater investments in these basic public services than spend on geopolitical power capabilities in order to seek reelection.

While I disagree with Trinkunas’ fundamental question about whether Brazil will choose to ascend or stick it out as a “critical” middle power, his U.S. foreign policy recommendations are helpful for advancing a more constructive and productive bilateral relationship. As he advocates, Brazil should contribute more resources, from international peacekeeping to humanitarian assistance, to project its national values, competencies, and its own multilateralist, consensus-building international strategies. Brazil may also benefit from scaling back the number of its multilateral initiatives to better focus on the most important. Certainly President Dilma has pulled back from former President Lula’s ambitious agenda in Africa, and it appears that her intensifying concern over the economy and fiscal policies leaves her little time to ponder geopolitics.

Will Brazil’s foreign policy principals change anytime soon? No, nor would U.S. interests be served by a rapid reorientation of Brazil’s international strategies. The long term, national interests of the U.S. are best served by working with Brazil to strengthen international economic and security regimes through consensus rather than imposition. The U.S. should understand that Brazil’s interest in anchoring collective security efforts in the South Atlantic is an opportunity, not a danger. Moreover, U.S. international economic policies, largely framed by the rhetoric of “competitive” capital and trade liberalization, continue to thwart market driven development around the developing world and fall painfully short of providing global leadership. Without significant changes in U.S. policies, it is unlikely that Brazil will concede to U.S. policy preferences, preferring to work with others, including the BRICS and IBSA, to stake out its principles of international economic governance and seek reforms that redistribute global market opportunities.

Trinkunas teaches us plenty about Brazil and the world. No doubt that Brazil has risen in global stature and economic importance. Brazil will likely rise in the future, although the pace is likely to be determined more by international economic factors than deep reforms in domestic policymaking. Brazil also seeks to become more influential in global governance matters, yet progress here depends on continued economic growth and development as well as an increasing willingness to spend more national resources on the creation of international public goods.

Do Brazilians share a thirst for major power status? Certainly some observers, including Trinkunas, might infer that Brazil’s active multilateralism reflects a consensus around doing what it takes to get to the center of the bargaining table on the most important issues facing global governance. No one would dispute that Brazil seeks dramatic changes in the institutions of international cooperation and law, and the foreign ministry works awfully hard to take advantage of every opportunity within sight. Yet, this does not mean that Brazil and its own representative institutions of governance are gearing up to project the nation as a major power anytime soon.

Yes, Brazil sits uncomfortably between the developed and the developing world with a penchant for the former and a political conviction to work closely with the latter. Expect Brazil to increase its contributions to “shaping and enforcing the rules that govern international order,” but mindful not to challenge the global power curve with a strategy that stalls its capacity to build international coalitions around democratic reforms of the institutions and rules that serve to entrench the status quo. The more relevant question is whether Brazilian foreign policymakers are improving the country’s capabilities with respect to incorporating more and more nations into global decision making to offer expanding opportunities for development through global trade and investment. Trinkunas’ assumption may be correct. Brazilians might be better off if the nation pursued major power status, but there is an equally compelling argument that Brazil’s current strategy is best suited to the majority of Brazilians who elect their governments to improve education and healthcare-at least for now.

Mark S. Langevin, Ph.D.

Director, BrazilWorks

June 3, 2014

 

 

Brazil’s Nuclear Power Plans Three Years after Fukushima

by Chris Cote
April 2014

The 2011 Fukushima accident interrupted plans to build four to eight new nuclear power plants and highlighted an internal debate over nuclear energy’s trajectory in Brazil. In anticipation of forthcoming strategy documents, this BrazilWorks Briefing Paper discusses the potential role of nuclear in Brazil’s future energy mix.

Read the entire briefing here: Brazil’s Nuclear Power Plans Three Years after Fukushima

The U.S. – Brazil Battle Over Cotton Subsidies

By Mark S. Langevin, February 6, 2014

The U.S. government is dead set against India and other governments around the world providing financial support to their poor farmers. At the same time, the United States is once again squaring off with Brazil, in another round of the long running “cotton dispute” between the two nations over U.S. subsidies. The U.S. government’s strategy of non-compliance with WTO rules against those subsidies has a clear goal. In soccer terms, it seeks to compel Brazil to accept the consolation match – rather than raise the champion’s trophy by winning U.S. compliance. A little bit of history is in order. In 2005, in a decision hailed widely at the time, the WTO’s Dispute Settlement Body (DSB)ordered the U.S. government to eliminate its cotton production subsidies as well as its agricultural commodity export guarantee programs. Read the entire article at The Globalist here.

The Petrobras Debt Challenge

The Petrobras Debt Challenge

A BrazilWorks Briefing Paper

January 2014

Paula Barbosa provides a timely analysis of Brazil’s government controlled energy company, Petrobras, and its debt and performance since the global financial crisis hit Brazil in 2008.  Her purpose is to offer a detailed understanding of the problems and challenges facing Petrobras from the perspective of its accumulating debt as well as its core business operations in oil and gas exploration and production and downstream refining and distributing. The major problematic for Barbosa is government provided financing, mostly through the Banco Nacional de Desenvolvimento, known as the BNDES.

This following summary analysis provides an English summary interpretation of Barbosa’s cogent analysis in the aftermath of the recent, first production-sharing auction for offshore, pre-salt blocks in the Libra field in which Petrobras played the central role.

Read the entire briefing here: The Petrobras Debt Challenge

Langevin: Brazil Is Too Big to Lose

 

“Langevin Brazil Is Too Big to Lose”
December 30, 2013

The Houston Chronicle
by Mark S. Langevin, Ph.D.

Texas is the commercial gateway to Mexico, but few understand the central role the Lone Star State plays in U.S.-Brazil relations.

Texas exports to Brazil are worth $10 billion and thousands of jobs. Brazil is one of state’s fastest-growing export markets through sales of crude oil, oil and gas equipment and services, chemicals, aviation products and agricultural products. Brazil and its national oil company Petrobras are ramping up oil and gas exploration and production activities throughout the massive, offshore and ultra-deepwater “pre-salt” reserves to double petroleum production by 2020. Texas-based oil and gas firms will play measurable roles in this oil bonanza.TexasFlag

Brazil’s chemical and plastics industries are on the rise, providing even more opportunities to Texas-based equipment manufacturers and service providers. Clearly, Brazil cannot realize its tremendous potential for oil and gas, chemical, and polymer production without Texas. Also, the state’s aviation industries will likely increase exports to Brazil as well. Brazil is one of the largest helicopter markets, due in large part to the expanding offshore petroleum production. Aside from civilian uses, Lockheed Martin and Bell Helicopters will tender bids for a growing list of military procurement contracts as Brazil becomes one of the top 10 defense spenders in the world by 2020. Texas is big on Brazil, but the state’s potential to do business with 200 million Brazilians will require greater bilateral cooperation between the governments of Washington and Brasilia to facilitate trade, open new markets and overcome the so-called “cotton dispute.”

Read the entire Op-Ed at The Houston Chronicle here.

What is the Future of the Bolsa Família Program?

For many the Bolsa Família (or Family Stipend) program has been the hallmark of the Brasilia consensus since 2003 when the government coalition, headed by the Workers Party, aimed to institutionalize pro-growth and income redistribution policies as the twin heads of a national development program.  In her recent briefing, Celia Lessa Kerstenetzky responds to the question about the future direction of the program after a widely recognized and successful first decade.  In the briefing, What is the Future of the Bolsa Família Program? she reports,

“When speculating about the programme’s near future, two distinct visions come to mind. In the first, by transferring cash to eligible poor people and targeting social services at them, the programme will take over the core of the Brazilian welfare state. In the other, the programme will find a proper place within a universalistic, rights-based social welfare architecture.”

 The first is vision is a liberal response to the legacy of poverty and discrimination in Brazil; the second is a economic and political project aimed at transforming Brazilian development and democracy by creating the conditions for an equal playing field for all Brazilians.  The first vision may not succeed in addressing all of the brutal aspects of Brazil’s legacy of poverty and discrimination and the second may be an overly ambitious response to the promise of democracy as a system of political representation, not necessarily a recipe for universal equality. Kerstenetzky argues,

“Back in the origins of the 2001 Bolsa Escola, and especially later with the 2003 Bolsa Família programme’s inclusion of extremely poor childless families, one finds a plain rejection of pauperism. These programmes were based on the non-pauperist assumption that poverty is not fundamentally
a matter of wrong choices by poor people but, rather, a lack of social and economic opportunities and protection—a diagnosis that couches them in the tradition of the universalistic welfare state (the second vision described above). “
She may be correct in her observation that former President Lula’s intent may have coincided with an analysis of the fundamental lack of opportunities, but this was the founding premise of his Workers Party, its very reason to govern.  Yet, the Workers Party led government, whether under Lula or current President Dilma Rousseff, may not embrace the entire project of building a universalist welfare state, only those aspects that parallel its electoral underpinnings.  Despite the briefing paper’s obvious value to all of us, Kerstenetzky does not offer a political-electoral analysis of the program or its future.  However, she does conclude that,

“making explicit the non- pauperist assumptions of the Bolsa Família programme—and unambiguously acting on them— may be the expected contributions of the public officials in charge of it to the public conversation on the programme’s future.”
In large measure, the upcoming 2014 federal elections, including that for the presidency, may decide the future of this watershed public policy program; and in doing so, frame how Brazil goes about including those at the margins of the global economy and Brazilian society for decades to come.

Brazilian Ports

The Brazil Business’ latest briefing on Brazilian ports is a must read.

The briefing spells out the major challenges and efforts to rectify the obstacles to modernize Brazilian ports for the global economy.

Accordingly, the briefing reports,

Since the beginning of the privatization of the Brazilian ports in 1995, the lessee companies of container terminals have invested approximately USD 1 billion acquisition of modern equipment, physical infrastructure, training of manpower and infrastructure.

 

Particularly after the injection of resources by the Federal Government through the Growth Acceleration Program (PAC), the situation at the Brazilian ports started to improve.

 

Part of the dredging works in the main Brazilian ports are finished. With the sea deeper along the ports’ area, it is estimated that around 30% of the vessels worldwide that could not dock in Brazil before, now can.

 

But what used to be an issue at the sea, now it is an issue at the land. The logistical problems of access are evident, the bottleneck of access from the cargo container terminals generate unproductive periods, which are highly detrimental to the foreign trade and financial activity of Brazil. It is a fact that the rail network and roads in the vicinity of the ports are insufficient.

 

Another great matter about the Brazilian ports is the bureaucracy. Besides making everything more expensive, slowness in the Brazilian ports invented a truly “congestion at sea”. Every ship that arrives in the country waits at least 5.5 days to have the goods delivered by agencies such as IRS, the National Sanitary Surveillance Agency (ANVISA), the Ministry of Agriculture and the Docks. The world average is three days.

 

In Brazil, the organs responsible for clearance of goods run only during business hours. It is the only country among the world’s major economies, which does not have these services available 24 hours.

 

Read the entire briefing here.

 

For more information on investments in the ports of the Northeast region, see the BrazilWorks Briefing paper:

 

Infrastructure Investment in Northeastern Brazil

Book Review: They Don’t Speak Spanish in Brazil

 

They Don’t Speak Spanish in Brazil:

A Guide to Life, Management, and Taxes for Doing Business in Brazil

By Joseph H. Low III and Cláudia Brito Low

The Don’t Speak Spanish in Brazil is really two books in one, and both are worth the read for different reasons.  The first eight chapters are really a cross-cultural guide to understanding and appreciating Brazil while sidestepping some of its apparent disadvantages. Chapters nine through sixteen along with the appendix and glossary is a well-written second book, more serious than the first, but a readable guide to those exploring the possibility of doing business in Brazil.  Both are worth the read, but it is the second that distinguishes They Don’t Speak Spanish in Brazil from a growing list of “brazil for beginners” type of books and business guides.

In 1987 when I first travelled to Brazil, many in my family assumed that Brazilians spoke Spanish as the authors imply. Today, more and more North Americans know more about Brazil than my parents did, and U.S. citizens are now the second largest group of foreign nationals that travel to Brazil, next to the Argentines.  So, while this book’s title may no longer apply to most readers in English, the thoughtful explanations, vivid reportings, and insightful teachings more than make up for the old school title.

The book is a long brew of all the complicated ingredients that make up what all of us experience as Brazil.  Yet, the authors pull together their experience and insight in chapter one to provide in a nutshell what they then go on to crack open in the following pages and chapters,

“Think of it in terms of a poker game. The Brazilian government is the dealer and they will always-always-have all the cards. If you want a seat at the table, you have to play by their rules and pay the buy in. If you’re going to stay, you have to commit.”

It is this insight and entertaining explanation of experience that makes the first book in They Don’t Speak Spanish in Brazil a fast read, especially for those already planning their trip to one of Brazil’s distinct destinations-like my favorite Ouro Preto in Minas Gerais. This first book works as a collage of the authors’ experiences woven through their cross-cultural sensitivity; and the methodology is as refreshing as an iced caipirinha on a blistering hot day in Cuiabá where I often work.  The authors draw a conclusion about Brazil and then tell a story or two to deliver it up to their readers in the most quenching way.  For example, on page 41 the Lows  explain,

“But here’s the more cultural point: nobody—and I mean nobody-eats lunch at their workstation. A desk and lunch is to a Brazilian what oil and water are to each other—they don’t mix.  Let me relate a story that shows you how important this lesson is.”

I won’t recount the story, but I recommend that you do because it reveals some of the fundamental cultural differences that distinguish Brazilians from North Americans, but in a way that invites adventure and eases the cross-cultural submersion into the delight that Brazil can be.

The Lows certainly highlight the best of Brazil, but don’t shy away from the ugly side either.  They note that Brazil does have a lot of crime, and much of it is horrifyingly violent.  Rather than simply dismissing crime or damning Brazil, the Lows report and then recommend,

“the police note that theives target trade shows, expos, convention centers, and the like because there are plenty of naïve, distracted foreigners carrying laptop bags and presentation equipment. The answer isn’t to avoid the expo altogether. You should take proper precautions. Don’t travel by yourself. Be vigilant about your surroundings. Don’t go into dark alleys. Stay in well-lit areas. Do your best not to appear too much like the tourist you actually are.”

Yes, the first book-the first eight chapters offer a great deal of insight and experience nicely packaged like one of Brazil’s giant chocolate easter eggs made for children and the sweet toothed adult-wow that even works as a metaphor for Brazil too!

The second book, chapters nine through sixteen, are the most readable treatise on Brazilian taxation and corporate structure that I have come across in past years.  There are dozens of guides on Brazilian taxation, from KPMG to Ernst and Young, but They Don’t Speak Spanish in Brazil is the only one that doesn’t require a tank of coffee or an afternoon nap to get through, seriously!  First off, the chapters are focused, well framed and essentially short… a key to high readability on anything that relates to taxation—especially in Brazil where it can get downright complex and confusing even for a tax professional.  I recommend this second book, this collection of chapters to those executives I work with that need to know, but won’t fall asleep trying to understand the decisions they need to make to work in Brazil.  So, for those of you have placed Brazilian taxation and corporate structure on your reading list, but are procrastinating; wait no longer.

Lastly, don’t just skim over the appendix and glossary, these are valuable tools for all of us, even the most experienced brazilianist can learn a thing or two from an appendix that spells out the major business incentives in every state of Brazil’s federated union as well as the glossary of terms-a concise short cut to weaving your way through the myraid of acronyms and terms that any Brazilian business must navigate.

Even if you’re an experienced traveler to Brazil, or often pass through São Paulo for a meeting or two, the book is worth the read; yes you may occasionally disagree with the author’s conclusions taken from their own experiences as reported in the first eight chapters.  For example, on page 88 the authors state the claim that Brazilians “turn off” during holidays and paid time off. Yes, most Brazilians do and for all the right reasons, but Brazilian business people do not always disengage… they all have smart phones and skype, so if you are engaged in a business transaction or activity; don’t be surprized to find your Brazilian counterpart trying to skype you over a matter of business while he or she is on the beach in Guarapari or trading e-mails with you in the airport waiting for a flight to Orlando.  Brazilian business folks now speak English and often know more about ourselves as North Americans than any of us would care to admit.  So read They Don’t Speak Spanish in Brazil, you will learn a lot about Brazil and yourself; a credit to the authors and their subject.

 

Review the book’s website here.

The Brazilian Tax System

 

Review of

“Evaluation of the Structure and Performance of the Brazilian Tax System

White Paper on Taxation in Brazil”

Discussion Paper: No. IDB-DP-265
August 2013

Published by the Inter-American Development Bank (IDB)

and written by:

José Roberto Rodrigues

Afonso Julia Morais Soares

Kleber Pacheco Castro

This White Paper is essential reading on the distinct policy dimensions of Brazilian Tax Policy and provides a critical assessment of the redistributive effects of current tax policies.  This short review outlines the key points and propositions advanced by the IDB,

“The problems include complexity, the heavy burden for the tax administration, the latent cumulativeness, the indirect burden on exports and productive investments, and even tax competition between states to an extent not seen in other federations, referred to by Brazilians as a “fiscal war (2013:6).”

In short, Rodriques, Soares and Castro argue that the Brazilian tax system is inefficient and unjust, and thereby undermines both the economic development of the country and amplifies the income inequality that continues to plague Brazil in the twenty-first century.

“In 2010, the overall gross tax burden reached 34.19 percent of GDP—the fifth highest in the country’s history, second only to the tax burden during the 2005–08 period. The tax burden totaled R$1,289 billion. In per capita terms, this level of taxation represented a burden of R$7,022.30 for every Brazilian. On average, every Brazilian resident had to work about 125 days a year (365 days) just to pay taxes (2013:12).”

It is an appropriate policy moment to discuss Brazil’s tax system, the historically high “take” coupled with the global and national economic slowdown raises the question of whether the current tax policies are sufficient, or worse, an obstacle to future economic growth and current social equity.  As the White Paper and its authors point out, the Brazilian state collects a large proportion of the Gross Domestic Product (GDP) in taxes, now well above 30%, but has not yet achieved a satisfactory level of quality public services, at least comparable to those developed nations that “take” a third of the economy in taxes.  The spat of protests in June illustrate the growing public concern over the relationships between income, taxation and public services.  Moreover, the authors of the paper point to the glaring weight of the levy of the ICMS, Brazil’s tax on merchandise, services and goods which amounted to 45% of all taxes collected and represented some 15.4% of the GDP in 2010 (2013:22). The ICMS is an indirect tax levied on common purchases of wage goods and services, and is therefore highly regressive especially in the context of high-income inequality. More than any other aspect of Brazil’s complex tax code, the ICMS contributes the most to the inefficiency and income concentrating effects.

With respect to Payroll Taxes, the paper criticizes the high levels of employer contributions to the overall weight of these deductions and transfers and suggests that reforming these taxes to reduce employer contributions could lead to great job creation and efficiency, thereby triggering greater productive investment.  While such outcomes might be expected given significant reductions for employers, there may be alternative fiscal and regulatory policies that could also achieve such ends.  While Payroll tax reforms might be warranted, they certainly are not priority at this time.

However, income and capital gains taxation in Brazil remain relatively low due to the over-reliance on the ICMS as the major source of government revenue in recent decades. In 2010 income and capital gains taxation represented 18.6% of all taxes collected and some 6.4% of GDP. In comparison with the ICMS, as well as the structure of taxation of more developed nations, Brazil’s income and capital gains taxation is too low, but cannot be reformed without a concurrent reform of the ICMS, namely the latter’s reduction as a source of government revenue.

The white paper treats other critical issues in Brazilian taxation, including inter-governmental transfers, but the core critique of this publication points to the growing need to integrate tax policy into a broader policy framework designed to advance equitable economic development. Indeed, the authors spell out a short list of policy reform areas for consideration, including:

1) Alleviating the fiscal war created by the ICMS and inter-governmental transfers;

2) Fixing the tax credit problem that undermines the country’s export led development dynamic;

3) Reducing “cumulative taxes” that distort the efficient allocation of productive resources;

4) The overall need to achieve greater tax equity and justice by lessening regressive taxation, namely the ICMS.

Overall, the IDB and the authors offer a compelling, well-researched policy framework for advancing greater research of Brazilian taxation and guiding policy discussion in an era of growing public and political concern over the gap between taxation and public services in Brazil.  The paper offers thoughtful policy analysis that identifies the need for reform and the opportunity to transform taxation to achieve multiple ends; government revenues, increased firm competitiveness and productive investment, and increased social equity.  While the private sector has always clamored about the need to reduce payroll and capital gains taxation, it is now time for civil society to understand taxation as a policy area that transcends the state’s “take” to finance public services.  Rather, and as the authors suggest, citizens and civil society need to advance a tax reform agenda that is compatible with Brazil’s need to grow through more equitable public policies.

Read the entire IDB White Paper here:

Evaluation_of_the_Structure_and_Performance_of_the_Brazilian_Tax_System