finance & manufacturing in Brazil

Monday 16 November, 2009

The Chicago Council on Global Affairs hosted this breakfast presentation Brazil’s Moment in the Spotlight? Here’s a summary of what Paulo Vieira da Cunha said:


  1. Brazil emerged from the crisis with its banking system intact & entrenched as an institution.
  2. a historical break in policy-making occurred in 1999 when a new” holy trinity” was established:  stable exchange rates, fiscal responsibility, inflation targeting.
  3. a decade of fiscal adjustment led to Brazil becoming a net creditor of foreign exchange
  4. it shed its external sin, so now can take on more external debt
  5. a stronger central bank leads to stronger financial institutions
  6. policy can be counter-cyclical-i.e. an enlarged safety net can reduce reserve requirements

negative aspects

  • Brazil is a large insulated closed economy
  • it’s difficult to increase productivity & reduce competition
  • it still has an overblown public sector-42% of GDP, (& spending is up 14% this year) making it more comparable to economies in Europe rather than in the Americas
  • the “holy trinity” was accomplished on the back of 10% higher taxes over a decade from 26%>36%

Now Brazil’s economy is recovering rapidly with increases in consumption, exports, currency appreciation.  The yield curve is steep, so there is worry about inflation kicking up in the 2nd or 3rd quarter.  Elections are coming in 2010.  There is still a need for fiscal adjustments.  The Lula legacy is:

  • the expansion of the safety net to include the new middle class
  • the transition to an economy with a large state
  • Brazil is becoming more like Europe, but doesn’t have the same efficiency yet.

Luis Mateus noted:

There have been big changes in Brazil since the 1990’s.  The middle class has emerged to fuel consumption & demand.  Automation has increased productivity & cut into the informal economy.  There are still many challenges:

  • high & complex taxes (differs by state)
  • becoming a high cost country-ex. raw materials & electricity
  • labor laws make it costly to right-size in Brazil
  • bureaucracy bogs things down.


  • Exports are growing to the US & EU, but with different composition
  • Brazil is now the world’s largest exporter of food
  • Lula has been a surprise on monetary policy, although there has been no progress in making the central bank an independent entity.
  • There is a need for better energy infrastructure-green laws exist, but enforcement is lax.
  • It’s tough to find qualified people in Brazil.  The quality of schooling is poor.  The system can’t differentiate between good & bad universities, so they spend a lot, but get back very little.
  • Physical security can still be a problem, but isn’t as bad as in Mexico City
  • Brazil is open for foreign direct investment with no foreign exchange restrictions, but there is still lots of protectionism.  Import duties are high on steel making it uncompetitive.  This is bad for the long-term because none of the inefficiencies are taken out.  Import subsistution distorts production structure.

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