Growth in Brazil
Randal K. Quarles
Assistant Secretary of Treasury for International Affairs
Remarks at the Brazilian-American Chamber of Commerce
New York City, July 17, 2003
you very much for inviting me here today. It's a pleasure to speak with you
about Brazil, especially at a time of growing optimism about Brazil's future.
name of this event - "Brazil:
From Stabilization to Growth"
— could not be more appropriate. Less than a year ago, the market was weighed
down by uncertainty in the lead-up to an election that would provide Brazil new
leadership after eight years of solid and stable policies under President
Fernando Henrique Cardoso. This uncertainty, and a somewhat turbulent global
environment at the time, combined to drive spreads on Brazilian bonds to more
than 2,400 basis points over U.S. Treasuries and the real to nearly four to the
dollar. Since then, there has been rebound in market confidence and greater
stability: the real has strengthened 20 percent and spreads on Brazilian bonds
have narrowed to 800 basis points over U.S Treasuries.
return of market confidence can be credited to the bold and far-sighted policy
choices of the Lula Administration in its opening months in office. President
Lula rightly recognized the importance of macroeconomic stability to the
achievement of the social goals he articulated in his inauguration speech. As
the government implements its program to forge a better life for all Brazilians,
economic policies will continue to be integral to the achievement of this
vision. The current period of rising confidence and stability creates a window
of opportunity for looking beyond short-term financial concerns and focusing on
the long-term priority of economic growth.
I would like to say a few words about developments in recent months, before
turning to the opportunities that lie ahead.
The Start of the Lula
President Lula and his economic team came into office committed to continued
fiscal responsibility, and to a monetary policy that makes long-term price
stability the top priority. They have delivered on their commitments: fiscal
performance so far this year has exceeded formal targets established in Brazil's
IMF program. And Brazil has formally committed to achieving similar primary
surplus targets in 2004. Thanks to the Central Bank's continuing efforts to meet
inflation targets, inflation is falling rapidly. Consumer prices declined in
June for the first time in more than four years and inflation appears to be on
the desired path.
Brazil's export sector has outperformed even the most optimistic expectations:
June's trade surplus measured $2.4 billion, generating a record high trade
surplus of $21 billion for the last 12 months. Even more compelling is the fact
that these results have been achieved largely through export expansion rather
than import compression. Brazil's impressive trade performance partially derives
from expanding trade with non-traditional trading partners such as China.
Diversifying its export markets not only increases total exports but also
reduces vulnerabilities to volatility in any single market.
Finally, the Lula Administration submitted to Brazil's Congress key pension and
tax legislation that goes to the heart of Brazil's long-term fiscal position.
Passage and implementation of these reforms will lay the foundation for the
reduction of Brazil's debt levels and free up future government resources for
productive investment. While more vigorous legislative debate lies ahead, we
commend the government's efforts to build broad support for reforms while
maintaining the key reform objectives.
Laying the Basis for
Brazil, as elsewhere, the ability of an economy to deliver rising standards of
living depends upon increasing the amount of goods and services that each worker
produces -- or, in the language of economists, increasing productivity. Labor
productivity in turn depends upon (1) the amount of capital that each worker has
to work with, and (2) the technology and efficiency with which the factors of
production are used. The goal of government policy should be to create an
environment that increases productivity growth by encouraging investment
(capital accumulation) and rewarding innovation, entrepreneurship and
competition (technological progress and increased efficiency).
is great potential for improving productivity growth in Brazil. Productivity
declined dramatically during the crisis years of the 1980s. Market-oriented
reforms in the 1990s were pivotal in reversing this trend. But productivity
growth remains modest, and international experience suggests that more can be
economic policies can unleash Brazil's potential for substantial productivity
gains. In Brazil, priority areas include tax and labor market policy, industrial
regulation, the financial sector, health and education, and trade.
Lula Administration's proposed tax reform provides a good example of a reform to
improve Brazil's business and investment environment and enhance the incentives
for capital accumulation and economic activity. The proposal seeks to replace
the remaining major cascading tax with a value-added tax. This would prevent
double taxation on inputs and lower production costs-and that has an obvious
positive impact on the competitiveness of Brazilian goods at home and abroad.
Another key component of the legislation would reduce the payroll tax burden.
High payroll taxes that keep labor costs high discourage job creation and push
employment into the informal sector. Reduction of the payroll tax burden
provides an incentive to bring Brazilian workers into the formal labor market.
importance of incentives is also prominent in the area of regulatory policy.
Attracting investment in Brazil's domestic infrastructure is essential to
supporting activity throughout the economy. Clear and transparent regulation is
needed to attract new investment to key industries such as energy and
telecommunications, so that investors can be confident in the long-run viability
of business plans. The United States knows from experience the complexities
inherent in the regulation of key industries. We look forward to sharing our
experiences with the Brazilian government as it continues its dialogue with
investors, government entities, and consumers on regulatory reform.
observers have commented on the high cost of credit in Brazil as a constraint on
investment. The government's continued progress in containing inflation will
allow for further reductions in the benchmark Selic rate, which will have a
direct impact on lowering borrowing costs. Beyond this, a number of factors
contribute to high bank lending rates that make credit prohibitively expensive
to most Brazilian businesses.
hold large amounts of Brazilian government debt, rather than loans, on the asset
sides of their balance sheets. Continued progress with sound fiscal policies
ought to allow a reduction in the total amount of government debt and thus a
reduction in this "crowding out" of bank credit, thus increasing the
availability of credit to the private sector. On the microeconomic side, high
bank operating costs and weak creditor rights also keep borrowing costs high.
Government policy matters here, too. Passage of bankruptcy legislation that has
been pending in Brazil's Congress for nearly ten years would represent
significant progress toward addressing the issue of creditor rights.
Experience from around the world has demonstrated that investing in people
through health and education is needed to build a capable and industrious labor
President Lula's Zero Hunger initiative is a good example of what the new
administration is doing to provide for such basic needs. In education, we hope
that the Lula administration is successful in building on the progress of the
1990s that increased primary school enrollment and reduced the adult illiteracy
rate. Passage of social security reform and other efforts to maintain sound
public finances will free up government resources for additional investments in
Finally, the area of trade presents a tremendous growth opportunity for Brazil.
The reduction of trade barriers encourages the growth of exports, enhances the
competitiveness of domestic industry, and lowers the cost of goods to consumers.
While Brazil has liberalized substantially in the last decade, total trade
(exports plus imports) as a share of GDP remains relatively low by middle-income
country standards, at approximately 29 percent of GDP in 2002. By way of
comparison, trade equals roughly half of Mexico's and Turkey's gross domestic
products, two-thirds of Korea's GDP and more than 100 percent of Thailand's GDP
in 2002. Brazil's trade performance over the past year, which resulted in an
accumulated trade surplus through the first half of the year of $10 billion and
a rolling 12-month surplus of $20 billion, demonstrates the importance of trade
to the overall health of the Brazilian economy.
Important multilateral initiatives to reduce trade barriers-globally through the
World Trade Organization, regionally through the Free Trade Area of the Americas
(FTAA)-are now underway. Brazil is positioned to take a leadership role in these
Ambassador Zoellick was recently in Brazil to discuss next steps on the FTAA.
much work remains to be done, the United States remains committed to achieving
the January 2005 deadline. As co-chairs of this effort, Brazil and the United
States bear a significant responsibility for bringing the FTAA to fruition. Our
goals are ambitious, but achievable.
first months of the Lula administration provide a good indication of its
seriousness in addressing Brazil's key economic challenges. Such a process is
never easy. But for each obstacle, there is also an opportunity.
this spirit, it was announced during President Lula's visit to Washington last
month that the United States Treasury Department and Brazil's Finance Ministry
will initiate regular consultations on accelerating economic growth in both
countries. This dialogue -- the Group for Growth -- will facilitate in-depth
discussions on growth strategies. It will enable us to share experience and best
practices for addressing common challenges. It will provide a forum for
discussions lessons learned in such areas as reforming fiscal and tax policies;
reducing impediments to the creation and expansion of small and medium-sized
companies; increasing investment and business credit; promoting trade;
developing infrastructure; and strengthening domestic competition.
Through this and other areas of engagement, the United States looks forward to
working with our Brazilian partners to advance growth and poverty reduction
strategies in our two countries and throughout the hemisphere.
you very much, and I look forward to this morning's discussion.
Revista INTER-FORUM is affiliated with
Any reproduction in part or whole is strictly forbidden without the authors written authorization
July 21, 2003