BRAZIL UNDER

LULA

OF F T

HE Y

E L LOW

BR

I C R

OAD

Robert AssuncaoDimitrios(James) Barlos

Derek DeRosaRossana Ferrara

Jonathan LeeJennifer Meekel

AGENDA• The BRIC• BRIC comparison • Brazil Background• Political Economy in Brazil: Lula 1st

• Our Recommendations• Update: since 2006

BRIC: BRAZIL, RUSSIA, INDIA AND CHINA

Acronym introduced in 2001 by Jim O’Neill (Goldman Sachs):

• Biggest and fastest growing emerging markets

• Global Capitalism

• 40% of the world population

• Potential Alliance

• Combined GDP of $15.435 trillions

According to Goldman Sachs by 2050 the combined BRIC economies could eclipse the combined economies of the current richest countries in the world.

The ten largest economies in the world in 2050, measured in GDP nominal (billions of USD)

BRIC COMPARISON: 2006 GDP

• Brazil: $948 Billion • Russia: $982

Billion • India: $909 Billion • China: $2682

Billion

Brazil Russia India China0

500

1000

1500

2000

2500

3000

948 982 909

2682

BRIC COMPARISON: GDP GROWTH (1990-2004)

• Brazil: 2.5%• Russia: -

0.9%• India: 5.7%• China: 9%

Brazil Russia India China-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2.5%

-0.9%

5.7%

9.0%

BRIC COMPARISON: GROWTH DRIVERS

• Brazil: Agriculture, forestry & fisheries and the mining & manufacturing

• Russia: Natural resources such as petroleum and natural gas

• India: Services (mainly IT-related)

• China: Gradual shift toward services, Mining & Manufacturing

BRIC COMPARISON: ECONOMIC DEREGULATION

• Brazil: Privatization, Expansion of Trade, Opening of Markets

• Russia: State owned enterprises local private enterprises and foreign enterprises

• India: Private sector’s share in gross fixed capital formation expanding

• China: Non-public enterprises share of mining & manufacturing and export sectors rising

BRIC COMPARISON: GINI COEFFICENT

• Brazil: 0.5• Russia: 0.3• India: 0.32• China: 0.4

Brazil Russia India China0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.5

0.3 0.32

0.4

BRAZIL:BACKGROUND

• 1500:Pedro Alvares Cabral reaches the coast A)Disease:Smallpox ,Malaria,Yellow fever B)Type of institutional setting• 1822:Prince Pedro constitutional monarchy• 1889:rebellion establishes republic• 1930:Revolution and dictatorship under Vargas• 1945:Return to democracy• 1964:Military coup• 1985:Return to democracy and the emergence of Lula • 1987:Constitutional Congress• 1989:Collor• 1992:Cardoso and the Real Plan

MODERN BRAZIL:STRUCTURE

• Federal presidential constitutional republic• Mixed economy • Civil law• Property Rights and Corruption (Index less

than 4)• Intellectual Property (The Two Faces of

Intellectual Property in Brazil)• Determinants of Economic Development A)PPP B)GNI C)HDI

BRAZIL UNDER LULA

• MACROECONOMIC STABILITY 2002-2006 A) Higher interest rates B) Improved corporate governance standards C) Budget Surplus D) Pension reform bill

• TRADE 2002-2006 A) Creation of G-20 B) Strengthen of MERCOSUR C) FTAA negotiations D) Strong demand from China

LULA VS INEQUALITY

• REDUCTION OF POVERTY A) Increase of minimum wage B) Noncontributory pension program C) Benefits for disabled D) School Grant

INEQUALITY

PROS:• Crime reduction

• Political, social, economic risk• Increased social mobility• Improved education

CONS:• Growth

• India and China

OPINION:• Inequality focus important but not a

priority• Too much risk

BRAZIL COST

• Brazil Cost: Cost of the inefficiencies of Brazil’s economy

• High Tax burden• Overvalued exchange rate• High interest rates• Red tape• Poor Infrastructure

EVALUATING LULA

• GRADE: B+ Globally

• Private consumption high• GDP up• Real GDP growth

• Education quantity vs. quality• Wealth redistributed• Productivity remained the same even though minimum

wage increased• Rating agencies: B+ BB

SWOT ANALYSIS

Strengths

• Only BRIC in the Americas• Favorable climate• Strong agriculture and mining• Population less than 1/5 of China and India• Fossil fuel independent• Democracy

S

Weaknesses

• Historically slower growing BRIC nation• Highest Gini coefficient of BRIC nations• Unequal land distribution• High crime rate areas• Democratic & bureaucratic inefficiencies

(Brazil Cost)• Large public sector and high interest rates• Lack of education of the lower class

W

Opportunities

• Recently discovered oil reserves• Demand for exports; especially from China• Shift to a net-creditor• Attractiveness for FDI• Future educated Brazillians

O

Threats

• Organized crime• Potential political uprising or unrest• Fluctuating demand for commodities• Political corruption• Low social mobility• Least spent in primary and secondary

education • Most spent on higher education

T

RECOMMENDATION

1. Macroeconomic Stability

2. Education Development

3. Legal System Reform

4. Foreign Direct Investment

5. Innovation and Entrepreneurship

Free market policies that invest in Brazil’s culture, people and natural resources, will foster long-run economic growth and the opportunity for every citizen to prosper.

AVOID ECONOMIC SHOCKS BY ENACTING POLICIES THAT WILL MAINTAIN STABILITY AND CONTINUE GROWTH

Fiscal Policy• Reduce Debt/GDP ratio.• Government investment, not government spending.• Lower corporate tax rates.

Monetary Policy• Independent and powerful central bank.• Manage money supply and interest rates to target inflation. • Quick and efficient foreign exchange intervention to

stabilize exchange rate.

MACROECONOMIC STABILITY

EDUCATIONDEVELOPMENTAN EDUCATED POPULATION IS A MORE PRODUCTIVE POPULATION.

• Invest in new education facilities.• Hire and train the very best educators and public school

officials. • Update curriculum with the latest methods and technology

to foster a better learning environment.• Teach financial literacy to encourage savings and

investment at an early age.

LEGAL SYSTEM REFORMHIGH LEVELS OF CORRUPTION REDUCE FOREIGN DIRECT INVESTMENT, THE LEVEL OF INTERNATIONAL TRADE AND THE ECONOMIC GROWTH RATE.

Reduce Violence, Crime and Corruption • Increase the police force to enforce the law and limit civil

disorder.• Provide education and employment opportunities for less

fortunate individuals.

Protect Property Rights from Private and Public Action • Increase investor confidence by strictly enforcing and adhering to

higher standards.

PROVIDES AN INFLOW OF FOREIGN CAPITAL, WHICH INCREASES THE TRANSFER OF SKILLS, TECHNOLOGY AND JOB OPPORTUNITIES.

Improve Infrastructure • Roads, bridges, utilities and public services.

Lower Barriers to Entry• Simplify the process to invest in Brazil.

Provide Corporate Incentives• Lower corporate tax and income tax rates.• Develop a tax holiday program.

Natural Resources• Protect Brazil’s precious assets.

FOREIGN DIRECT INVESTMENT

THE GROWTH ENGINE FOR NEW PRODUCTS, BUSINESSES, MANAGEMENT PRACTICES AND MARKETS.

Deregulation• Remove legal restrictions.• Simplify the process and ease of starting a business.

Privatization• Reduce the amount of State Owned Enterprises.• Encourage competition among private businesses.

INNOVATION & ENTREPRENEUSHIP

Marketing a Transition

UPDATE: Since 2006

Lula (second term 2006-2010)• Social Investment• Reversed stimulus

measures in 2010• Monetary tightening in

2010-2011• $11,000 PPP in 2010

UPDATE: Since 2006

DilmaRousseff (2011-Present)• Bus Rapid Transport project• My Home, My Life• Continual increase to minimum monthly wage• Privatization• Expectations of continued deregulation• Brazil above UK (6th largest economy)• Currently: $2.08 Trillion GDP and 4.7% unemployment

QUESTIONS?