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Brazil Towards a Sustainable Growth Path: Stabilization and Consolidation of Structural Reforms Armínio Fraga January 2001 1 Overview 1. Recent Developments 2. Longview I: Macro Reforms 3. Longview II: Structural and Micro Reforms 4. Growth Prospects 2 1. Recent Developments 3 Recent Developments • Progress in the structural fiscal reform • Inflation stabilization • Floating foreign exchange regime • Balance of payments improvement • Economic growth recovery 4 Fiscal Performance 16 Public Sector 14 12 % GDP 10 8 6 Nominal Deficit 4 2 0 Primary Surplus -2 -4 -6 Jul Jan 95 96 Jul Jan 97 Jul Jan 98 Jul Jan 99 Jul Jan Nov 00 (+) deficit (-) surplus Flows in 12 months, based on the GDP reviewed on October 2000 5 Consumer Prices IPCA 12-month variation (%) 25 20 15 10 5 0 Jan 96 Jul Jan 97 Jul Jan 98 Jul Jan 99 Jul Jan Jul Nov 00 6 Exchange Rate 2.20 R$/US$ 2.00 1.80 1.60 1.40 1.20 Jan 99 Mar May Jul Sep Nov Jan Mar May Jul Sep Dec 00 7 Current Account and FDI 40 US$ billion 35 30 25 20 15 10 5 0 Jan Apr Jul 98 Oct Jan Apr Jul Jan 99 Current account deficit * /* (+) deficit 12-month variation data Oct Apr Jul Nov 00 FDI 8 Exports Quantum and Price Index 105 160 150 100 Price 95 130 120 90 110 85 Quantum 140 100 90 80 80 75 70 Jan Apr Jul 98 1996 average = 100 Source: Funcex Oct Jan 99 Apr Price Jul Oct Jan 00 Apr Jul Nov Quantum 9 External Debt / Exports 550 500 450 400 350 300 1995 1996 1997 1998 1999 10 2. Longview I: Macro Reforms 11 Longview I: Macro Reforms • Structural fiscal reforms • Inflation targeting / floating exchange rate 12 Structural Fiscal Reforms • Privatization • State banks reform • Public administration reform • Social security reform • Fiscal Responsibility Law • Fiscal Crime Law 13 Medium-Term Fiscal Scenario Net Public Sector Debt 52 49.68 49.94 49.28 % GDP * 50 47.60 48 46 43.41 44 42 40 1998* 1999* /* GDP reviewed on October 2000 2000 2001 2002 14 Public Administration Reform • Efficiency and cost reduction • Enhanced public services • Transparency and social control • Managerial reform: the “Avança Brasil” 15 Social Security Reform • Private workers mandatory regime • Public service regime • Complementary pension regime 16 Social Security Social Security Balance - Accumulated in 12 months (R$ billion) ALT 12 10 8 6 4 /* (+) deficit Jun 00 Mar 00 Dec 99 Sep 99 Jun 99 Mar 99 Sep 98 Jun 98 Mar 98 Dec 97 0 Dec 98 2 17 Social Security Reform Private Workers Mandatory Regime Annual Deficit 1.7 % GDP 1.5 ALT Previous Scenario 1.3 1.1 Post-reform Scenario 0.9 0.7 1999 2002 2005 2008 2011 2014 2017 2020 18 Inflation Targeting • Focus on inflation • Commitment • Transparency 19 3. Longview II: Structural and Micro Reforms 20 Longview II: Structural and Micro Reforms • Education and health • Global integration • Privatization / competitiveness / regulation • Banking reform • Capital markets reform • Tax reform 21 Education Net Ground Schooling Rate 96 % 97 % 93 % 91 % 89 % 86 % 1991 1994 Source: MEC/INEP/SEEC 1996 1997 1998 1999 22 Education Iliteracy Rate - Brazil 1990-1998 20 19 % of population at 15 or more years of age 18.3 18 17.2 17 16.4 15.6 16 15 14.7 14 14.7 13.8 13 12 1990 1991 1992 1993 1994 1995 1996 1997 1998 23 Source:IPEA, based upon PNAD Education System’s Expansion 1995-1999 (enrollment increase %) Basic education 13 % High school and technical education 57 % College education 28 % Source: MEC 24 Health Infant Mortality Rate (per 1.000 new-born) 47.8 1990 45.2 1991 43.0 1992 41.1 1993 39.6 38.4 37.5 36.7 36.1 1994 1995 1996 1997 1998 25 Evolution of the per capita federal social expenditure 750 Brazil 1980-1998 700 In 1998 R$ 650 600 550 500 450 400 350 300 GSF PER CAPITA AVERAGE GSF PER CAPITA 26 GDP per capita GDP per capita * 1962 - 1999 In 1999 R$ 6.000 5.000 4.000 3.000 2.000 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 1999 /* GDP reviewed on October 2000 Source: IBGE 27 170 Price variation of the basic basket vis-a-vis variation of the minimal wage Brazil 1994-2000 150 In R$ 130 Minimal wage 110 90 Basic basket 70 50 28 Source: PROCON/DIEESE Proportion of the poor and the indigents over the total population - Brazil 1977-1998 60 51.0 % of total population 50 45.3 42.6 41.7 40 32.7 30 25.0 28.2 20.7 22.1 19.5 20 13.9 10 9.8 0 1977 1980 1983 1986 Indigence Line Source: PNAD (1977-1998) Preparation: IPEA 1989 1992 1995 1998 Poverty Line 29 Average Import Tariffs 1990 32.2% 1993 16.5% 1997 13.8% 1999 13.8% 30 ISO 9000 6,000 Certificates Issued 5,285 5,000 4,000 3,000 2,000 1,000 0 1990 1991 1992 Source: ABNT (estimated ADTP) 1993 1994 1995 1996 1997 1998 1999 31 Privatization Program 1991 - 2000* US$ million Program Sale Revenue Debt Transfer TOTAL 46,724 11,326 58,050 Telecommunications 26,978 2,125 29,103 Other 19,746 9,201 28,947 State Privatizations 26,172 6,592 32,764 Total 72,896 17,918 90,814 Federal Privatizations *As of 1st March 32 Infrastructure Investments 2000 - 2003 Sector Total Investment Private Sector (US$ billion) Telecommunications Energy Oil Transportation Total 45 52 54 23 100 % 86 % 31% 52 % 174 68 % 33 Electric Power Generation Installed Capacity (GW) 68.0 64.5 61.5 59.2 57.3 55.5 54.1 1994 * estimated 1995 Source: MME 1996 1997 1998 1999 2000* 34 Information Technology Installed Computers (millions) 8.3 6.8 5.6 4.0 2.3 1995 * estimated 1996 Source: MME 1997 1998 1999* 35 Information Technology Internet Users (millions) 3.4 2.9 1.8 1.4 0.7 0.2 1995 * estimated 1997 Source: MME Jan 98 Jul 98 Dec 98 1999 36 Telecommunications Mobile Phones (millions) 17.5 15.0 9.2 6.0 2.5 0.6 1994 *As of May 1.3 1995 1996 1997 1998 1999 2000* 37 New Regulatory Framework Regulatory agencies Competition policy Consumer protection Intellectual property rights Environmental legislation 38 Banking reform Supervision / regulation Payments System Financial liberalization 39 Banking Spread 70 65 % p.y. 60 55 50 45 40 35 30 Jan 98 Apr Jul Average banking spread Oct Jan 99 Apr Jul Oct Jan 00 Apr Jul Nov 40 Capital Markets Reform Corporate Law Accounting standards Regulation 41 4. Growth prospects 42 Summing up • Openness Competition • Deregulation Investment • Stabilization Predictability • Privatization Efficiency 43 Growth Accounting • Labor force growth 1.5% • Capital accumulation 2.5% • Productivity (TFP) 1 - 3% 44 Brazil Towards a Sustainable Growth Path: Stabilization and Consolidation of Structural Reforms January 2001 45