Also: Fernando Pimentel, Minister of Development, Industry and Foreign Trade, gives an exclusive interview to Making it

COUNTRY FEATURE: BRAZIL

Brazil is the largest country in area and population in Latin America and the Caribbean. Characterized by large and well-developed agricultural, mining, manufacturing and service sectors, its economy also outweighs that of all other South American countries, and is now ranked the sixth biggest economy in the world. Over the past two decades, Brazil has posted robust economic growth, stabilized inflation, reduced its debt and accumulated hefty reserves. Its middle class has expanded, poverty has dropped and Brazilian expatriates are returning home.

Beginning in 2004, the combination of progress on economic reform, extremely favourable global external conditions and social policies that raised real incomes, led to higher and sustained rates of growth.

After strong growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in 2008, and the economy experienced a recession as global demand for commodity-based exports dwindled and external credit dried up. However, Brazil was one of the first emerging markets to begin a recovery, and in 2010, consumer and investor confidence revived. Since then, rising inflation has led the authorities to take measures to cool the economy, and these actions, together with the deteriorating international economic situation, slowed growth in 2011.

Reducing poverty

According to the World Bank, poverty (purchasing power parity of US$2 per day) has fallen markedly, from 21% of the population in 2003 to 11% in 2009. Income inequality (measured by the Gini index) reached a 50-year low in 2011. Key drivers have been low inflation, consistent economic growth, well-focused social programmes and a policy of real increases for the minimum wage. Despite these achievements, inequality remains at relatively high levels for a middle-income country, and there are still extreme regional differences, especially in social indicators, such as health, infant mortality and nutrition. The richer south and south-east regions enjoy much better indicators than the poorer north and north-east.

The government of President Dilma Rousseff has adopted a series of measures aiming to curb the economic slowdown. These include tax cuts, credit facilities, restrictions on imports and incentives for domestic consumption. Most recently, the government has focused on initiatives to boost production, especially in industry, the sector hardest hit by the current global crisis. A 28% cut in electricity rates for the producers of aluminium and cement came into effect in February 2012, and in August the government announced that other branches of industry would also be granted a reduction. (The cost of electricity in Brazil is among the highest in the world, even though most of the country’s energy comes from hydroelectric power, the cheapest source – a situation explained by the large number of different taxes and other expenses that amount to 45% of the final cost.)

Enhancing competitiveness

There have been other indications of the government’s new-found focus on enhancing industrial competitiveness. In August it also announced an ambitious plan of public-private partnerships in transportation and logistics, with ports and airports to follow. Further massive investments in areas such as urban and social development and transport infrastructure are expected as the country prepares to host the World Cup in 2014 and the Olympic Games in 2016.

And in October, new rules were finalized so that local carmakers can avoid a steep tax increase by making vehicles more fuel efficient, using more domestically-built parts and investing more in Brazilian research and engineering. The government measures are designed to pressure carmakers to boost employment and investment in Brazil if they want to tap its vaunted demand and are part of a concerted defence of an industry representing more than a fifth of the country’s manufacturing base.

South-South cooperation

Under the government of Luiz Inácio Lula da Silva (2003-2010), Brazil achieved a hitherto unparalleled position of international leadership, and the Rousseff government is continuing the drive to improve the country’s international clout by strengthening its status as a donor country. This new cooperation and development aid strategy has been taking shape since 2005, when Brazil earmarked US$158m for foreign aid. That amount rose to nearly US$363m in 2009 and to an estimated US$400m in 2010, according to figures from the Brazilian Cooperation Agency.

Latin American countries receive 45% of Brazil’s foreign aid, with the rest distributed among other areas of the developing South. The projects range from livestock and fisheries to horticulture and food production. Brazil is supporting the development of an experimental cotton station in Mali, a rice station in Senegal, a vocational training centre and food security programme in East Timor and soybean production in Cuba. Other examples include the provision of technical expertise and assistance in the development of agricultural technology in Haiti, the establishment of a vocational training centre in Paraguay, and the creation of the Institute of Agriculture and Livestock in Bolivia.

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From ‘years of lead’ to sixth leading economy

with Fernando Pimentel, Minister of Development, Industry and Foreign Trade

Before starting his political career, Fernando Pimentel was a professor at the Federal University of Minas Gerais, Vice-President of the Association of University Professors of Belo Horizonte, Chairman of the Regional Council of Economics in Minas Gerais, and Director of the Minas Gerais state Union of Economists. As a teenager he had been actively involved in the organized opposition to the military dictatorship, a period often referred to as “Brazil’s years of lead”, lasting from 1964 to 1985. In 1970, Pimentel was arrested and spent several years in military prisons.

In the 1990s, he worked in the municipal government of Belo Horizonte, the capital of Minas Gerais state, where he held the posts of Secretary of Finance, and then Secretary of Government, Planning and General Coordination. In 2000, he was elected Deputy Mayor, and, as of 2003, took over as Mayor after the early retirement of the incumbent for health reasons. In the 2004 elections, he was elected Mayor of Belo Horizonte as the candidate of the Workers’ Party (Partido dos Trabalhadores, PT), winning 68.5% of the votes. Pimentel was the first ever mayor of Belo Horizonte to win in the first round of voting.

His tenure as mayor of the third largest metropolitan area in Brazil was marked by large investments in urban and social programmes. Among the highlights was the Vila Viva, the largest programme of urbanization of villages and shantytowns in the country, which built new sanitation and drainage infrastructure at a cost of USS$27m and constructed over 1,000 new houses. In 2005, he was ranked the eighth best mayor in the world by the World Mayor Project (the only South American in the top ten), and he left office in 2008 with an approval rating above 90%.

At the end of his term as mayor, Pimentel set up his own consulting firm, P-21 Consultoria e Projetos Ltda. During 2010, he served as a close adviser to Dilma Rousseff, the PT candidate in the country’s presidential election. Rousseff won the election and when she took office, on 1 January 2011, she appointed Pimentel as Minister of Development, Industry and Foreign Trade.

It has been a challenging portfolio, with the Brazilian economy stuttering following a growth spurt during 2004-10 (when GDP growth averaged 4.5% per year). Brazil’s economy grew just 2.7% in 2011 as soaring business costs and uncompetitive industries took the shine off of what had been one of the world’s most dynamic emerging markets. The performance of the economy will be weaker in 2012, and annual GDP growth is estimated at just 1.5%.

The biggest drag on Brazil’s economy is manufacturing, which has been contracting since early 2011, suffering in particular from structural competitiveness problems. But Pimentel is upbeat about the impact of the government’s to increase industrial competitiveness at a global level.

“There are many initiatives by the federal government to stimulate global competitiveness, industrial development and economic growth, most of which are part of a national development plan called Plano Brasil Maior (the Bigger Brazil Plan), or PBM for short.”

The PBM was unveiled in August 2011 with the objective of integrating government measures regarding industrial, technological and foreign trade politics over a three-year period. Pimentel outlines some of the actions planned, “There will be preferential price margins for government purchases, meaning that in order to stimulate local production and the market, the government may give preference to purchasing from local manufacturers with prices up to 25% higher than similar products of foreign origin. Other measures include new and improved lines of investment, especially for financing and innovation enterprises, which will be provided by the Banco Nacional de Desenvolvimento Econômico e Social; a reduction in labour costs, to be brought about by a fiscal rebate on payrolls; and improved trade defence efforts.”

The latter is a measure in response to increasing pressure on the government from domestic industry to curb the entry of foreign products into the country. According to the World Trade Organization (WTO), the value of Brazilian imports leapt from US$20bn in 2000 to US$191bn in 2010, a 380% rise. At the launch of the PMB, Pimentel mentioned that the government would be focusing on better control of Brazil’s borders in order to catch counterfeit goods coming from China.

Another long-standing complaint from the private sector is the high cost of doing business in Brazil. What is known as the custo Brasil refers to the increased operational costs which make Brazilian goods more expensive compared to those from other countries. There are several factors that contribute to the extra cost, including high and complex taxes, poor infrastructure and high transport costs, high electricity costs and reams of red tape.

Asked what the government is doing to reduce the custo Brasil, Pimentel replies, “Besides the numerous actions in the PBM, the government is making unprecedented investments to further improve infrastructure in Brazil. Recently, President Rousseff launched a logistics investment programme, allocating R$133bn (US$65bn) in funds to build 10,000 km of roads and 7,500 km of railroads throughout the country. A federal agency of planning and logistics has been created to study and manage logistics investments.”

Pimentel continues, “Another example is the recently announced reduction of energy costs, beginning in 2013. While residential consumers will be positively affected, industry will benefit the most, with an up to 28% reduction in energy costs.”

Brazil remains a difficult place to do business from a regulatory point of view, despite the market reforms adopted over the past two decades or so. According to the World Bank’s 2012 annual Doing Business study, which evaluates the ease of starting a business, dealing with construction permits, registering property and paying taxes, Brazil ranked 126th this year out of 183 countries. On average, it takes 13 procedures and 119 days of work to start a business.

Pimentel’s response is bullish. “Starting a new enterprise is becoming easier in Brazil. The Ministry of Development, Industry and Foreign Trade is in the process of integrating databases from the chambers of commerce in each state and gradually simplifying the documentation necessary to formalize and legalize a business.”

Asked which high-added-value industrial sectors will be promoted in order to create quality jobs, as well as increase industry’s share of GDP, Pimentel rattles them off, “Automotive, chemical, oil and gas, naval, health care, defence, aeronautical and space, IT and electronics, for example,” speaking with the authority of someone in charge of what last year overtook the United Kingdom to become the world’s sixth largest economy.