Brazil is the largest country in Latin America and also the fifth largest country in the world. It shares common borders with every country except Ecuador and Chile. It has a coastline of over 9170 kilometers, almost all of it along the South Atlantic Ocean. More than half of Brazil lies at about 200 meters above sea level with the Great Escarpments running along the coast. Arable land is found in the South but this is changing with the development of agriculture in the Central-West and the North. Tropical forest cover vast areas in the Amazon region. Most of Brazil is in the tropical zone, except the southern part which is the temperate zone. It is hot and humid along the coastline and in the North. There is drought in the Northeast region.
Brazil is very rich in its natural resources. Besides the traditional cocoa and coffee, it is also a major exporter of soybeans, orange juices and many other tropical crops. As for mineral resources, it has some of the world’s largest iron ore deposits and is now one the biggest gold producers. It also produces crude oil and since the energy crisis is the 70s, developed its alcohol industry from sugar cane. The largest hydroelectric power producer in the world, the Itaipu dam, is in the extreme southwest. The fishing potential along the coastline is also significant. The Amazon basin with its tropical rain forest also offer great possibilities for wood related products although this is under much international pressure.
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The population is around 162.88 million and growing at around 2 percent per year. Over 90% live on 10% of the land. 75% of the population is urban while 25% are rural dwellers. Around 30% live in the ten principle metropolitan areas. 55% of the population is under 20 years of age and less than 10 % is over 60. The average life expectancy is 63 years. The majority of Brazilians are of European of African descent. The main ethic groups include the Portuguese, mulatto, black, Italian, German and Japanese. The official language is Portuguese. However, English is the foreign language used by the business community. The literacy rate is around 75%. Around 5% of students go to higher education.
The metropolitan areas of Sao Paulo and Rio de Janeiro have populations of around 15 million and 10 million. There are also 20 other major cities of other 1 million including Brasilia, the capital, Curitiba, Fortaleza, Porto Algre, Recife and Salvador.
Going on to Brazil’s political climate and forces, it has been a Portuguese colony for 300 years since its discovery in 1500. Brazil became a republic in 1889. In its periods as a colony, the infrastructure was built to provide the exploitation of resources for its mother country, that is to export raw materials. The Republic is divided into the federal and state governments. There are 23 states, 3 territories and 1 federal district. The federal government is divided into the executive, the legislature and judiciary. The President is the head of the executive branch with a number of executive departments which the heads form the Cabinet. The legislative branch, the Congress is made up of the Senate and the house of Representatives. The judicial branch consists of a system of federal, state and local courts throughout the country, headed by the Supreme Court.
The Federative (Federal) Republic of Brazil went through a period of military autocratic regime through 1964 to 1990 until the first popularly elected president since 1960, Fernado Collor de Mello. Although the chance of the military of having a coup is slim, they still remain a strong political force. This is because the armed forces have not suffered a national defeat, such as the Argentine military did in the Falklands War, and because the military government was not taken to court for its mistreatment of citizens. The military favors a nationalist economic policy, promoting development and strength based on national security requirements. This in turn created an industrial policy aimed at achieving self-sufficiency in modern weapons systems. Brazil is the world’s fifth-largest exporter of armaments.
President Collor had significant support and vowed on reform on the much needed economic policy. He planned to lower tariffs, control inflation, promote free trade and to reduce the over bloated public sector. However, in 1992, he had to resign due to charges on corruption. His successor, Collor’s vice president, Itamar Franco was seen as indecisive in economic matters. He changed economic ministers three times in his two years as president in unsuccessful attempts to control inflation. He chose to make increasing growth as has priority rather than reducing inflation. On a already huge deficit, he tried to increase government spending to stimulate growth.
The president elected on October 3rd (although he still needs to go through the second round in November 15th) Fernando Henrique Cardoso was Franco’s last finance minister. He pushed through a stabilization program which included raising income tax rates on both companies and wage earners. He put a heavier responsibility on the middle class and the rich. He has introduced the "Real Plan", which includes the introduction of a new currency, the real, which in a matter of months cut inflation from 50% a month in June to just under 2% in September. The plan deindexed wages and balanced federal budget. He also plans to cut federal expenditure and to privatize money-losing state companies, such as the government monopoly of telecommunications which were previously viewed as too sensitive in national interest to be sold to the public.
Luis Inacio Da Silva, commonly known as Lula, was the second runner up in the two most recent presidential elections. He is president of the Workers Party (PT) and stresses social justice, restraints on market capitalism, limits to integration with the world economy, debt relief and a large state role. He represents the left wing of the Brazilian politics which is growing in importance.
Since 71% of the population is Roman Catholic, the Brazilian Church has traditionally had great influence in the political scene. In recent years, Vatican has strengthened controls over the Brazilian church and making it more conservative. However, the church still maintains a left-of-center social-action wing which excising influence on voting results. The Brazilian church is closely related to the poorer and express sympathies and support for PT.
The current presidential elections would put an end to the recent political turmoil. However, as president, Cardoso would still have to face an over represented Congress from the poorer North and Northeast regions and one that greatly hinders the power of the President through the 1988 Constitution Amendments. This would make the President have greater problems in carrying economic reforms because the business community and the powerful are well represented in the Congress. With 19 political parties and a weak government after years of military involvement, the government has shown little ability for a coherent economic plan. However, continuous hyper-inflation has caused much dissatisfaction among citizens and Cardoso seems to be making the right decisions, at least in this aspect. Therefore, a market with greater economic stability and freedom and a government with a more coherent economic strategy is to be expected.
As indicated above, Brazil as a culture is a very mixed and culturally diverse country. Many are European in origin but with much native blood. Brazilians are viewed as passionate, open and patriotic especially when it comes to soccer in the eyes of the western world. However, they are also conservative, especially when related to religion. Since over 70% of the population is Roman Catholic, the Vatican conservative values also greatly influence the everyday Brazilian. The business hours for the normal working day is eight hours, Monday to Friday. Besides Independence Day and other Christian holidays, the Carnival (Mardi Cras) in February/March each year causes a standstill to all businesses Monday through Wednesday.
There are great disparities in income distributions with 60% of the national wealth concentrated in the hands of 1% of the population. An estimated 20% of the population lives below the poverty line, often in urban slums, defined as half or less of the family income needed for minimal levels of food and shelter. There are also indigenous tribes living in the Amazon Basin. The rich are considered to be westernized and very European. The poor are viewed as infested with crime and disease.
Nearly half the population is black or mulatto. Deep divisions exist between whites and blacks. A century after the abolition of slavery, blacks lack adequate political representation, education, housing and health care. Their living standards are also far below those of white Brazilians. In the 19th century, German, Lebanese, and Italian immigrants began to arrive in Brazil. In the beginning of the 20th century, there was an onset of Japanese immigration to Brazil, a trend which has increased almost exponentially to this day.
The investment and business environment for Brazil has been doing well. In the 1970s, Brazil was viewed as the economic miracle among the developing countries because of its vast natural resources, abundant human resources and the fast increasing industrial base. However, in the 1980s and 90s, because of its foreign debt crisis, a worldwide recession, its semi-skilled or unskilled labour and decrease in price in most commodities, high inflation rate and slow economic growth throughout South America has shifted its importance and therefore investment funds to the Pacific Rim – South East Asia. However, for Canadian businesses, the South American continent offers great opportunities for its vast consumer base, location, and its similarities in language and culture.
The Brazilian government supports free enterprise and the free-trade system. However, state and semistate entities still control nearly all the public utility sectors and the petroleum industry and oligopolistic situations. Brazil was a relatively closed economy in the 1970s and 1980s. In 1993, exports and imports were about 8.7 and 5.8 percent of GDP.
The two main economic problems Brazil is facing is slow economic growth and hyper inflation. the average annual inflation between the years 1989-1993 was 1533% and the real GDP growth (%) of around 0.3%. Therefore the government policy in recent years has been to promote economic growth.
Economic development plans are set up to:
* achieve a more even distribution of income and wealth on both an individual and a regional basis.
* reduce the foreign debt.
* reduce inflation to manageable levels through cost reduction and control of monetary expansion.
* continue foreign trade surpluses
* develop the agriculture sector.
* upgrade the labour force.
* privatize the public sector companies.
* strengthen the local capital market.
Started by President Collor, the National Privatization Program was to privatize many steel, petrochemical and fertilizer companies. A free-trade zone is also available in Manaus in the North and is used to attract business to the Amazon Basin. As for overseas trade relations, Brazil is a member of the Latin American Integration Association (LAIA) and the signatory to the General Agreement on Tariffs and Trade (GATT). By December 1994, Mervosul, an agreement between Brazil, Argentina, Paraguay and Uruguay would gradually lower tariffs until they gradually reach zero in 1995. The agreement would also provide coordinated policies between these countries. There is also a Brazil-Argentina bilateral agreement that would increase trade between these two countries. The general trend is the lowering of trade barriers and import duties in Brazil.
The government generally welcomes long term investment provided that the firm is committed to contribute to economic development, particularly those involved in the development of agriculture and technology and of labour intensive industries and the manufacturing of products that are currently imported and those that will increase export.
Although there are no federal tax incentives to attract foreign capital, many states and local government offer tax concessions especially at the poorer Northeast and Amazon regions.
Except for the above tax incentives, all corporations are subject to 26% corporation income tax which is high for a developing country. In the Manaus free-trade zone created in 1967, imported foreign goods are tax free, provided they are consumed within the zone or are exported abroad.
Although foreign capital is generally treated the same as local capital, some restriction still apply. There is strong control over foreign currency transactions and is monitored by the National Monetary Council, whose president is the Minister of Finance. All foreign currency loans also have to be approved by the Central Bank. When Brazil is short of foreign exchange, the Central Bank centralizes all foreign currency repatriation and remittance requests and releases foreign currency as and when it becomes available. This causes delays, although the Bank pay interest compensations.
There is restriction on foreign ownership in certain industries viewed as strategically important. This includes communications, aviation, classified government contracts, coastal and freshwater shipping, mining and hydroelectric energy, financial institutions, electronics, and privatized companies. Other than these, the foreign firms are generally allowed to have 100% foreign ownership. National capital companies, under the constitution may also receive temporary market protection or benefits in those activities considered to be important for national development. This included mines, mineral-resources exploration and electric power generation. There is limitation on rural land but there is no restriction on ownership of urban land and buildings.
The principle regulatory agents include the Central Bank (BACEN), the Security Commission (CVM), the Administrative Council for Economic Defense (CADE), the National Institute of Industrial Property (INPI), the Industrial Development Council (CDI) and the Foreign Trade Department (DECEX) of the Bank of Brazil.
Security markets are available with the principle stock exchanges in Sao Paulo and Rio de Janeiro. All public issues of securities have to be registered with the Securities Commission (CVM). The preparation and approval of a registration statement can be very time-consuming.
On the other hand, a wide range of credit and financial services are available from an extensive banking network. However, banking and financing business is regulated by the Central Bank. The major banks in the private sector have been organized into financial conglomerates, able to offer full range of financial services through subsidiary and association companies. A point to note is that Brazil is not an international financial center and offshore banking, trust and financial services are not allowed.
Imports have been generally been subject to high tariffs. However, these are generally starting to fall and deregulation of import procedures is also under way. Import licenses are controlled by DECEX, the Foreign Trade Department of the Bank of Brazil. The maximum import duty rate would be reduced to 40% by the end of 1994 and the modal rate is also scheduled at 20%.
For a corporation (sociedade por acoes), besides the 26% corporate tax, 15% tax is also charged on dividends. Although a corporation can be wholly foreign-owned, an investment with local participation is favored by the authorities. For the director of the corporation must hold a permanent visa and be domiciled in Brazil although nationality is not a restriction.
As for the labour force available, it is mainly semiskilled and unskilled. Skilled labour is short in supply. The labour force is approximately 62 million, or 41% of the total population. Women comprise 35 % of this force, and this percentage is projected to increase. All employees are required to hold work cards on which the terms of employment are recorded. Work permits are divided into 3 types of visas for foreign personnel. The Businessman’s Visa for a temporary visit of 90 days, a Temporary Residence Visa which the holder is entitled to work in Brazil for two years and a Permanent Visa which is usually difficult to obtain unless for top executives of a foreign company. A foreigner must hold a Permanent Visa and be domiciled in Brazil to be able to serve as a director of a Brazilian subsidiary of a foreign company. All employers, with few exceptions are required to employ Brazilians in the proportion of at least two-thirds of their total personnel as regards both number and total remuneration. There is a minimum wage and labour unions have become more active especially following the 1989 national two day strike. Despite of this, labour unions generally do not cause much unrest.
Patent and trademark laws are available on a federal level. Environmental awareness has increased due to the international pressure, especially from the US. This has restricted the exploitation of resources from the forest.
Since the main economic policy is to increase exports, reduce foreign debt and inflation, there are tax free incentives for reinvesting government approved projects. Foreign firms can also buy the debt securities in the world market at a discount rate and reimburse it at full value in certain projects in Brazil.
There has not been much improvement in the railway system recently, while road transportation still dominates. However, the highways are not well maintained and construction of new highways has been slow in the recent years. The airline network is well developed and mainly privately owned. Urban transport poses significant problems especially in the metropolitan areas of Rio de Janeiro and Sao Paulo. The postal system is well developed while the telecommunication system still needs much improvement.
Another troubling aspect of doing business with the government is the cumbersome and corrupt bureaucracy. Sometimes, businesses must bypass the normal bureaucratic channels and seek the help of top-level government officials. Businesses must also use the highly specialized despachante system. For a fee, a broker would see papers signed and moved more rapidly than through the bureaucracy. Also, an estimated one-third of national legislators have placed relatives on the congressional payroll.
As we see now, Brazil’s economy and democratic state is starting to do some good. U.S. relations has been in good terms with Brazil. This country is beginning to be a type of role model for the surrounding Latin American countries. A kind of leader for the rest of the South American countries. As of now Brazil is considered to be in a stable mode at the moment but whether or not that will stay, has to be seen in the future, because it has a tendency to be explosive.
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