MACROECONOMIC AND FINANCIAL STABILITY Throughout the years, Brazil has managed to keep inflation under control.

However, starting from the first quarter of 2013, inflation rates have risen up to 6%. Official figures published on April 10th show that Brazils inflation problem goes well beyond salad. Prices rose by 6.6% during the past year, breaching the two-point tolerance band around the Central Banks 4.5% target. The price of more than two-thirds of the items used to calculate inflation rose in the past month. Now the mockery seems to have spurred the bank to act. On April 17th it raised the base interest-rate by 0.25 points, to 7.5%. Market watchers expect rates to hit 8.5% by the years end. The belated rise comes just as it has sunk in that Brazils economy is failing to regain momentum after stalling last year. Fewer new jobs are being created. Industrial production and an economic-activity index widely seen as a leading indicator of GDP growth both fell in February after rising in January. Core retail sales fell for the first time in almost a decade, a particularly worrying sign given that only domestic consumption kept Brazil out of recession in 2012. However, the belated interest-rate rise suggests that the bank recognises it needs to regain some lost credibility. Its operational independence has been in question since August 2011, when it cut rates even though inflation had reached 7.1%and kept cutting even though inflation remained above target (see Exhibit 1). Dilma Rousseff, the president, has trumpeted low interest rates as a conquest by her government ever since. Days before the banks monetary-policy meeting Guido Mantega, the finance minister, said that tackling inflation no longer required heavy artillery, as in the past. Exhibit 1 : Brazils Inflation Rate

Source: Haver Analytics Exhibit 1

Decreasing public debt is another strategy adopted by Brazil and has been practiced since 1989 under the Collor administration as the cause of the inflationary conjuncture that existed at the government transition. It was the tiger that the President promised to kill with only one shot. In December 1989 it has reached 100 billion dollars by the official exchange rate at that time. The economical measures of the Collor Plan I - launched in the first daysof his administration - were able to reduce in almost 80% the net public debt and turned it negative ( credits superior to the debts) for the Federal Government (Alvim, 1998). Part of this magic is associated with the confiscation that every plan for fighting inflation has enclosed, including the Real Plan, which was made previously in the URV (referential value unit) phase. Another part is related to the confiscation of assets - such as the guaranteed gold deposits and the valuation of the Brazilian currency - with the consequent reduction of the debt expressed in dollars - by the retention during a determined term of a large fraction of the financial assets. Just like the debt, after the Collor Plan, seems undervalued when expressed in dollars so is the present debt overvalued by the valuation of the Real relative to the dollar, after the former currency was created. The apparent contradiction that an over valuation of the national currency generated opposite effects derives - as will be seen in what follows - from the fact that in December 1991 most of the debt was external and at the end of 1997 most of the debt was internal (Alvim, 1998). There is consensus that good governance is of central importance to achieving and sustaining macroeconomic stability and high-quality growth; and that sound fiscal managementincluding fiscal transparencyis a key aspect of good governance as reported by IMF. Brazil stands between Slovenia and Germany in fiscal transparency, according to International Budget Partnership.

Exhibit 2 : Fiscal Transparency Ranking

Source: International Budget Partnership

HIGH INVESTMENT CONFIDENCE Brazil has outlined clear rules, with reliable legal and institutional framework. It is one of the few countries which do not have tax dividends and profit remittance. This factor has led Brazil to become one of the top countries for foreign direct investment. In 2010, Brazil ranked 7 in foreign direct investment at USD49 billion. It moved up to the 5 spot in 2011 at USD67 billion. In 2012, Brazil moved up another notch to the 4 place between Hong Kong and United Kingdom, although the value decreased to USD65 billion.
th th th

Exhibit 3: Foreign Direct Investments Ranking

Source: United Nations Conference on Trade and Development (UNCTAD)

INFRASTRUCTURE CONCESSION PROGRAM On 15

th

August 2012, Brazil Government has launched a large-scale investment and concession

program to update the country's national transportation network. The program foresees initial investments of R$79.5 billion over the coming five years and R$133 billion over 20 to 25 years and allows for private concessions and public-private partnerships of between 25 and 30 years for expanding the country's highway and railway networks. Concessions will cover 7,500 kilometers of highways and 10,000 kilometers of railroads. Auctions will follow the pattern established by past concession programs for highways and airports, with bidders agreeing to take on needed investments in exchange for collecting fees from users. Bidders seeking the lowest fees will win the concessions. The first highway concession auctions could occur as early as April. Brazils National Development Bank (BNDES) will offer financing for up to 80% of investments taken on by the private bidders. The large-scale investment and concession program comes as part of the government's latest efforts to overcome the country's logistics and structural bottlenecks to promote greater economic growth. The concession program will help kickstart stalled investments under the governments Accelerated Growth Program (PAC). As of July, infrastructure investments under PAC were approximately 15% behind schedule. PAC investments are considered crucial for Brazil in run up to the 2014 World Soccer Cup and the 2016 Rio de Janeiro Olympics. According to recent market estimates, the country's economy is seen growing by less than 2% this year after posting 2.7% growth in 2011 (Brazil-US Business Council, 2012).

QUESTIONS 1. How does Brazils political system affect the countrys economic growth? Brazil is a democratic country. Brazil has always been plagued by inflation since World War II. Some researchers has a common view that military governments are better at stopping ination, at least in the short run, because they are capable of resisting populist tendencies that are common in new, fragile, and/or highly unequal democracies (Kaufman & Stallings, 1992) . Nevertheless, in the Brazilian case democracy was crucial in two important ways. First, ination in Brazil had a complex mix of sources such that a degree of policy experimentation and learning-by-doing was necessary in order to gure out how to resolve the problem. The military did not have this room to maneuver, and it certainly did not attempt any radical innovations. It is also important to recognize that ghting ination in a country with an inationary history must be focused on managing actors expectations about the future, and this depends crucially on government credibility. Every time a governmentunder military or democratic ruletried and failed to solve ination, it lost credibility on later initiatives. The military, however, had no mechanism to recover credibility, and, therefore, no political space to continue to experiment with stabilization policies. Democracys advantage is that each new election brings forth a new government (presuming that the public is fed up with the incumbent), with a honeymoon period of credibility and a new opportunity to introduce fresh policies. Democratic systems are thus able to learn from previous governments failures while shedding their illegitimacy (Gerring, Kingstone, & Lange, 2011).

2. In which way does Brazil culture can influence the cost of doing business in this country? Anybody wishing to do business with Brazil and the Brazilians should be aware of the various cultural and structural barriers which might confront them. Probably the most pervasive barrier encountered by foreign companies dealing in Brazil would be the 'Custo Basil' or the 'Brazil Cost'. This term refers to the very real extra costs of doing business in Brazil corruption, governmental inefficiency, legal and bureaucratic complications, excessive taxation, poor infrastructure, inflation etc. Although this 'costa' is difficult to define and has lessened in recent years, it remains real and the cause of great frustration for international business people. For example, living costs in Brazil is very high, and labour cost is the highest in South America. Apart from that, even renting office spaces is cheaper in the Netherlands and Germany than Brazil.

References:

Alvim, C. (1998). Brazillian Debt. Economy and Energy. Brazil-US Business Council. (2012, August 16). Government unveils sweeping concession program. Retrieved from Brazil-US Business Council: http://www.brazilcouncil.org/news/governmentunveils-sweeping-concession-program Gerring, J., Kingstone, P., & Lange, M. (2011). Democracy, History, and Economic Performance: A Case-Study Approach. World Development, pp. 1735-1748. Kaufman, R., & Stallings, B. (1992). The political economy of populism. In The macroeconomics of populism (p. Chapter 2). Chicago: University of Chicago Press.