Brazil is the largest economy in Latin America and has a population of 192 million people. In 2010 Brazil’s GDP was 2.1 trillion with an annual growth rate of 7.5%.
The real has appreciated steadily since 2003.The entry of foreign capital in the Brazilian market is one of the main reasons for the steady appreciation of the Brazilian currency. Inflation expectations have risen, and, given the carryover from late 2010, year-on-year inflation has surpassed the ceiling of the official monetary target since June. The national development bank (BNDES) was created to resolve a market failure. This liquidity injection was helpful in avoiding a credit crunch during the crisis but risks becoming an obstacle to private entry into this market segment now that the situation has normalized.
Brazil has a costly pension system, whose assets and liabilities are not aligned and whose sustainability is threatened by changing demographic trends, an aging population, and steadily increasing pension benefit levels. Brazil under-invested in infrastructure for over three decades, and infrastructure investment rates have come up only slowly since 2007. Infrastructure needs are sizeable in almost all sectors. Environmental licensing remains a significant source of investment delays, especially in the energy sector, because of the frequency of disputes around infrastructure projects.
The government should increase the tax on loans taken by banks and companies abroad to prevent the appreciation of the real in the short-run and increase exports. The current policy combination of exchange-rate flexibility that followed the abandonment of the peg in January 1999 with an inflation target is still the best choice. Structural reforms to strengthen the macro-prudential framework would further enhance the resilience of the economy to asset and credit bubbles. The fiscal target needs to be set in line with the long-term sustainability of government and social security accounts. To improve budget management, the government should phase out recourse to one-off revenues and contingency measures, which have undermined the balance target and the predictability of fiscal policy. Satisfying Brazil’s financing needs as the country develops will require increasing private-sector participation in the long-term credit market, beyond acting merely as distributors of smaller BNDES loans In the future, minimum pensions should be indexed to the consumer price index for a number of years to reverse the fast pension increases of the past while preserving the purchasing power of pensioners. Brazil should consider equalizing the retirement age for men and women, as is the norm in the vast majority of countries. The public-private partnership framework should be streamlined. The federal government should provide special loans to help municipalities in financial difficulty. This will provide the right incentives to exploit available scale economies. The authorities should increase public investment in railways in context of fiscal consolidation, given the long-term pay- off associated with this type of investment.
Brazil was colonized by the Portuguese in the 16th Century. At the time the main exports were lumber and gold, and eventually sugar, tobacco and coffee. In 1822 Brazil declared itself independent of Portugal, and immediately set about establishing trade relationships with Northern Europe, the United States, and Latin America. In 1889 a republican government was established in Brazil.
In 1937 Getulio Vargas gave himself dictatorial power. To help with Brazil’s economy he established high tariff’s to protect domestic producers. He also put into effect exchange rate controls to keep the currency stable. To continue growing the economy Vargas made sure that state-owned enterprises expanded, most notably...