I - The Economy

2. Growth

Gross Domestic Product (GDP)
Employment
Pro-Investment Measures

2. Growth

Many criticized the Real Plan because they believed a tight monetary policy would not allow the economy to grow. Just the opposite has ocurred.

Gross Domestic Product (GDP)

The Gross Domestic Product (GDP) expanded 4.2% in 1995. It is estimated that it grew 3.1% in 1996.

Given the rates of growth projected for the next few years, Brazil could grow some 30% during the period 1993-98, achieving an annual GDP of US$1 trillion by the turn of the century. If the current rate of population growth continues, Brazil's per capita income would reach US$6,000.

That level of income would represent a substantial improvement for the population, but the government's objectives are even more ambitious. It wishes to reach a level of income that is much closer to that of countries which, at present, are relatively developed.

Graphic 13

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Employment

Unemployment is one of the most discussed current issues. Following a small rise in the unemployment index during early 1996, the unemployment rate returned to a level of 5% later in the year. This rate is comparable to that of the United States (5.4%) and significantly less than that of such countries as Spain (21.9%), Argentina (17%) and France (12.7%).

Graphic 14

The IBGE unemployment index, represented in the graph below, is the only Brazilian index comparable to that of other countries because it is the only one that applies the same methodology as that used in other nations. As the IBGE index shows, the rate of unemployment did rise between 1995 and early 1996. Subsequently, however, it stabilized and today is lower than it was in 1993. Between November and December 1996, the rate of open unemployment registered in the country's six principal metropolitan areas dropped from 4.56% to 3.82%, well bellow the 5.42% average for the year.

This fact does not signify that there is no unemployment. It means simply that we are measuring, in terms of averages, what is happening on a national level. Research that points to high levels of unemployment usually refers to local situations or to specific economic sectors that are being restructured. The fact that the highest unemployment rates are in São Paulo, for example, reflects movement in the country's economic standard, a change in industrial investment, or even a geographical shift of economic activity.

The automobile industry should be analyzed separately. At the beginning of this government, only two states had automobile production plants — São Paulo and Minas Gerais. These two states now have more auto factories than they had two years ago, and they have enlarged their output. During the same period, the auto industry has expanded to Rio de Janeiro, Paraná, Rio Grande do Sul and Santa Catarina. It will soon be going to the Northeast and to Goiás.

The auto industry produces vehicles with advanced technology, and the parts industries must achieve these same technological standards. Many component producers have already adjusted to this new situation, some are in the process of adjustment, and others have closed. The government has not ignored this situation. The BNDES has created a special credit line to assist the parts producers, just as it did for the textile industry and the shoe manufacturers to restructure their operations. In addition, the Ministry of Labor has been financing numerous support programs. The Professional Training Program, for example, trained close to a million workers in 1996.

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Pro-Investment Measures

The government has implemented concrete and effective measures to stimulate development. On one hand, it is firmly controlling inflation. On the other, it reduced interest rates, expanded credit facilities, and continued the privatization of state companies. It also launched a program of priority objectives — Brazil in Action (Brasil em Ação). This program promotes public investment in ports, railways, waterways, roads, education and health in order to provide adequate physical and human infrastructure for the country's development.

The increased consumption, the redistribution of income and the reduction of unemployment were made possible by the government's pro-growth policies. These policies included the reduction of taxes, of financial charges and of infrastructure costs.

Reduction of Taxes

a) Sales Tax

One of the government's most important pro-investment actions was to reform the sales tax (ICMS). With the new ICMS, the producer, whether he is a big or small farmer, industrialist or merchant, is exempt from paying the ICMS on his inputs: raw materials, electrical energy, office supplies, etc. This measure represents a reduction in investment costs of about 15% and, in some cases, as much as 30%. It should cause investment to rise to nearly 20% of GDP and should account for additional annual GDP growth of 1.5%. The new law eliminates also the ICMS on exports of raw materials and semi-manufactures, such as soybeans, orange juice, minerals and steel products. These items, which account for a third of Brazil's exports, have been paying as much as 13% in sales taxes. With this change, we will be able to export more, to create more employment, and to improve salaries. The national producer has had to face the unfair competition of imported goods that do not pay taxes even while he has had to bear a heavy tax burden. With the new law, the national producer will be in a better position to compete and, therefore, to retain his Brazilian work force.

b) Other Tax Measures

Besides the sales tax reform, two other pro-investment measures are worth mentioning: 1) the reduction in the corporate income tax rate from 25% to 15%, and 2) the creation of a simplified tax system for micro and small enterprises. The new tax procedure for micro and small companies will enable them to simplify their tax obligations significantly.

Reduction of Financial Charges

The effective interest rate that the Central Bank pays on new government bonds fell from 4.2% per month in May 1995 to 1.8% in December 1996. Although this rate is still relatively high, the government-sponsored long-term interest rate for investments in January 1995 was about 26% per year, and the tendency is for it to continue falling.

Graphic 15

Besides the decline in interest rates, the availability of credit has also improved. The cost of credit declined noticeably throughout 1996 as the government eased monetary and credit policies. The cost of borrowing working capital, which was about 9% per month in mid-1995, declined to about 4.5% by the end of 1996.

Graphic 16

Reduction of Infrastructure Costs

Besides its fiscal and financial measures to promote growth, the government has made a major effort to reduce infrastructure costs. Over the past two years, it has transferred to the private sector a significant number of activities whose presence in the public sector is no longer justified.

a) Privatization

In 1995, the government created the National Council on Privatization (Conselho Nacional de Desestatização), dependent directly on the President's office, in order to facilitate the privatization process. Eight firms were sold that year for a total value of US$1.63 billion, of which US$1.0 billion were receipts and US$0.63 billion represented debt transferred to the new owners of the firms.

The year 1996 represented a turning point in the privatization effort for several reasons.

First, the privatization of the petrochemical sector was completed with the auction of five firms (Deten, EDN, Polibrasil, Prolipropileno and Koppol). Thus the first phase of the program, initiated in 1991, came to an end. During that phase, a total of forty-five firms were transferred to private ownership. They were principally in the steel, petrochemical and fertilizer sectors.

Second, the procedure and timing for the privatization of Vale do Rio Doce were determined. This company should be auctioned off in 1997, thereby essentially finishing the privatizations in the industrial sector.

Third, the transfer of public services to the private sector was accelerated, via both concessions and leases.

In the electrical sector, the company Light was privatized in May 1996. At US$2.35 billion, it was the largest single sale of the program to date. At the level of the states, which own most of the electrical distribution companies, CERJ ( Rio de Janeiro) was sold in November for US$587.4 million, i.e., a 30.27% premium over the minimum sales price. In addition, several other distribution companies are in the process of being privatized, such as COELBA in Bahia, CEMIG in Minas Gerais, COPEL in Paraná, CEMAT in Mato Grosso, and ENERSUL in Mato Grosso do Sul. The BNDES is giving technical and financial support to help these firms in the privatization process, just as it did with CERJ.

The sale of 35% of the voting shares of the Telecommunications Company of Rio Grande do Sul (CRT) for US$655.5 million should be included among the privatizations at the state level.

In the transport sector, the privatization of the railroad system has made notable progress. Of the six networks in the federal system (RFFSA), five have been granted in concessions, generating receipts of US$1.5 billion. They are the five principal railroad networks, responsible for transporting no less than 97% of the cargo carried by RFFSA and close to 30% of all the cargo transported by rail in the country (this percentage rises to 50% if one excludes the Carajás railroad operated by Companhia Vale do Rio Doce).

At the state level, in December 1996 a concession was granted for US$24.9 million to a private enterprise to transport the rail cargo of the FERROESTE. The transaction raised the total receipts for state-level privatizations to US$1.27 billion.

Foreign capital played a major part in the electric energy and the railroad privatizations. The leading role of foreign capital in these first infrastructure privatizations suggests a clear tendency for 1997. It also contrasts sharply with the first stage of the privatization program (until 1995) when domestic capital accounted for 95% of the transactions.

Highways were also privatized, with 860 km of federal roads being transferred to the private sector, including such important ones as the Via Dutra (connecting Rio de Janeiro and São Paulo) and the road between Rio de Janeiro and Juiz de Fora.

The inclusion of 31 ports in the National Privatization Program (Programa Nacional de Desestatização) is also worth mentioning. Seven of these 31 ports are already in the process of being privatized. Initially, the ports of Cabedelo in Paraíba, Itajaí and Laguna in Santa Catarina, and Porto Velho in Rondônia will be privatized. A second stage will include the ports of Recife, Maceió and Manaus. At the same time, an increasing number of private terminals are being leased at the ports.

Revenues from the National Privatization Program in 1996 totaled US$4.08 billion. Adding this amount to the US$1.27 billion obtained in 1996 by the states produces a total of US$5.35 billion. This figure was more than twice the US$2.63 billion obtained in 1993, which up to last year had been the largest amount obtained in a single year.

The National Privatization Program concluded its fifth year in 1996, having produced revenues of US$14.96 billion and having transferred US$4.56 billion in debts to the private sector. Thus, the total public sector financial benefit of the sales was US$19.52 billion. This figure does not include the eventual transfers of debt as part of the privatization of CERJ, CRT and FERROESTE.

Privatizations
1991-1996

(*) Does not include possible debt transfers from the privatizations of CERJ, CRT and FERROESTE.
Source: BNDES

Summary of Privatizations During the
Fernando Henrique Cardoso Administration

Companies privatized

Government receipts (1995-96): US$6.35 billion

b) Brazil in Action

The program Brazil in Action consists of 42 priority development projects and activities valued at R$79 billion. They are designed to ensure the availability of the physical and human infrastructure needed to promote investment. These projects, only part of the government's total effort, were selected on the basis of their potential to stimulate productive investment and growth. The objectives are:

• to reduce production and marketing costs, and thus spark a series of other investments that will sustain economic development over the coming decades;
• to increase the effectiveness of government actions, concentrating on selected well-defined targets, and avoiding an ineffective dispersion of resources;
• to introduce a new management model (focused management);
• to seek the maximum degree of cooperation with the private sector; and
• to make the economic system increasingly receptive to private and public investment.

Brazil in action

Source: MPO

The principal figures of the program for 1997-98 are:

Source: MPO

Total value of the projects, by sector - (1997-1998)	R$ millions
Agriculture	10,324.9
Communications	16,618.0
Education	1,783.0
Employment	7,138.9
Energy	3,429.0
Housing	5,176.6
Sanitation	2,664.7
Health	2,382.8
Transportation	4,640.8
Tourism	201.0
Total	54,359.7

Source: MPO

The transport sector demonstrates how the Brazil in Action program can reduce infrastructure costs. One example is the Northwest Corridor (the Madeira river waterway and highway BR-364) which will cut the cost of shipping a ton of soybeans via the port of Santos from US$102 to US$66. On the Center-North Corridor (Araguaia-Tocantins rivers, North-South railway, the ports of Ponta da Madeira and Itaqui), the cost will fall from US$87 to US$38. Finally, on the Eastern Corridor (the Unaí-Pirapora and Minas-Vitória railways, and port of Tubarão), the cost will go from US$62 to US$38.

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Contents

I - The Economy 3. Fiscal Situation