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BRAZIL 2015: A REFORM AGENDA Armando Castelar Pinheiro (based on joint work with Fabio Giambiagi) Seminar at the Inter American Development Bank Washington, October 4, 2005 Outline • First- and second-generation reforms • Why did reforms fail to spur higher growth? • A new agenda of reforms – Macro – Structural – Institutional Growth: the main motivation for reforms Period GDP growth Contributions to GDP growth of (a) A=B+C+D Capital Total Factor Labor (C) (B) Productivity (D) 1931-45 4.3 1.7 1.0 1.7 1946-80 7.4 4.6 1.4 1.4 1981-93 1.6 1.3 1.1 -0.7 Change from 1946-80 to 1981-93 - 5.8 - 3.3 - 0.3 - 2.1 Source: Armando Castelar Pinheiro, “Is Institutional Reform the Key to Brazil’s Accelerated Development?”, 2003, mimeo. The 1990s reforms • Explanations for growth deceleration – Very high inflation – Semi-autarkic economy – State’s inability to invest in infrastructure due to fiscal crisis • Goal: – Resume growth by attracting private investment and fostering TFP growth through increased competition, private ownership and constraints on policy discretion. -5 Source: IBGE. 2004 12 2003 11 2002 10 2001 09 2000 08 1999 07 1998 06 1997 05 1996 04 1995 03 1994 02 1993 01 1991 12 1990 11 1989 10 1988 09 1987 08 1986 07 1985 06 1984 05 1983 04 1982 03 1981 02 1980 01 Inflation was brought under control Monthly consumer price inflation (IPCA, %) 85 75 65 55 45 35 25 15 5 Comparative Indices of Structural Reform Overall Trade Financial Tax Privatization Labor index 1985 0.26 0.08 0.30 0.18 0.00 0.75 1999 0.61 0.84 0.50 0.52 0.50 0.70 Regional 1985 average 1999 0.34 0.52 0.26 0.33 0.00 0.59 0.58 0.89 0.70 0.48 0.26 0.60 1985 0.49 0.77 0.54 0.44 0.00 0.69 1999 0.61 0.95 0.73 0.51 0.16 0.68 Brazil Chile Source: Eduardo Lora, 2001; “Structural Reforms in Latin America: What Has Been Reformed and How to Measure it” Working Paper 466, Inter-American Development Bank. Reforms failed to bring high growth back GDP growth Period A=B+C+D Contributions to GDP growth of (a) Capital Total Factor Labor (C) (B) Productivity (D) 1.7 1.0 1.7 1931-45 4.3 1946-80 7.4 4.6 1.4 1.4 1981-93 1.6 1.3 1.1 -0.7 1994-04 (b) 2.7 1.0 0.6 1.1 1946-80 to 1981-93 - 5.8 - 3.3 - 0.3 - 2.1 1981-93 to 1994-04 1.1 - 0.3 - 0.5 1.8 Change from Source: Armando Castelar Pinheiro, “Is Institutional Reform the Key to Brazil’s Accelerated Development?”, 2003, mimeo. GDP growth outlook (%) 2003 2004 2005 2006 World 4.0 5.1 4.3 4.3 Developing economies 6.5 7.3 6.4 6.1 Western Hemisphere 2.2 5.6 4.1 3.8 Brazil 0.5 4.9 3.3 3.5 Source: IMF. Economia GDP growth: Median market forecasts (%) 4,9 3,5 3,5 2006 2007 3,7 3,3 3,5 1,9 1,3 0,5 2001 2002 2003 Source: Central Bank. 2004 2005 2008 2009 Why did reforms fail to spur rapid growth? • Washington Consensus – Lack of depth • Augmented Washington Consensus – Lack of breadth • Error in adopting universal policy agendas: insufficient customization (focus, sequencing and institutional arrangements) • Too much market, too little state intervention Insufficient depth • Government continues to get in the market’s way Large public deficit and debt High rates of interest Low integration into world economy High taxes Sources: Central Bank and IBGE. jun/05 dez/04 jun/04 dez/03 jun/03 dez/02 jun/02 dez/01 dez/00 jun/01 jun/00 jun/99 dez/99 dez/98 jun/98 dez/97 jun/97 dez/96 jun/96 dez/95 jun/95 Real interest rates on public bonds (%, p.a.) 30 25 20 15 10 5 0 0 Source: World Bank, WDI 2005. Japan Venezuela, RB Peru Pakistan Russian Federation Norway 40 Algeria Niger Madagascar Guinea Spain Afghanistan Kuwait Georgia Denmark Canada Korea, Rep. Albania Angola Oman Côte d'Ivoire Zambia Senegal Lebanon Turkmenistan Malawi Costa Rica Mauritania Gambia, The Macedonia, FYR United Arab Emirates Bulgaria Jordan Vietnam Moldova Eritrea Hong Kong, China Imports / GDP (%, 2003) 160 140 120 100 80 60 Brazil 10.3% 20 Augmented Washington Consensus • Market failures reflect weak or missing institutions Washington Consensus necessary but insufficient. policies Goods institutions are necessary improve incentives and reduce risk. AWC = WC + institutional reforms. are to Institutional reforms • New competition law and agencies • Regulatory reform and independent regulatory agencies in infrastructure and capital markets • Stronger creditor rights (bankruptcy law) • Judicial reform • Public sector reform • Business and labor regulation reform Insufficient breadth • Regulation of infrastructure: problems of sequencing and sectors with incomplete (electricity) or missing regulation (sanitation) • Competition and regulatory agencies lack sufficient autonomy • Financial sector: new bankruptcy law, but no change in collateral and procedure codes • Judicial reform: little yet implemented • Barely anything done to improve labor and business regulation Country-specific agendas “The only constant in development is systemic dynamic change. This would hardly be worth stating, were it not that development theory has been presented as if its propositions are universally applicable, no matter what single feature of development policy they choose to stress and no matter which country its recommendation address. As a result, development policy advice has rarely been specifically tailored to the country’s initial conditions, widely interpreted”. Irma Adelman, Fifty years of economic development: What have we learned?, ABCDE Conference, World Bank, 2000. Universal Laws • • • • Macroeconomic discipline Rule of law Good policies Right prices and incentives Focus, sequencing and institutional arrangements should be countryspecific The role of the state • Problems Fiscal crisis and liberal reforms (as well as democracy?) reduced the state’s ability to foster and direct investment Inadequate balance between carrots and sticks (Latin America vs. East Asia) • Promote state role in leading economic development State should pick winners and support losers Greater scope for industrial / investment policies Growth of GDP and capital stock (% p.a., 5-year moving avg) 14 Capital 12 10 9,0% 8 6 3,8% 3,8% 4 2 GDP 1,8% PIB Capital média 1935-45 média 1946-80 média 1981-93 média 1994-2004 2004 2001 1998 1995 1992 1989 1986 1983 1980 1977 1974 1971 1968 1965 1962 1959 1956 1953 1950 1947 1944 1941 1938 -2 1935 0 Brazil: Savings and Investment: 1947-2004 28% 26% 24% 22% 20% 18% 16% 14% Gross capital formation Gross National Savings 12% 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 1955 1953 1951 1949 1947 10% Savings breakdown (% of GDP) 30 25 20 15 10 5 0 -5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -10 Public Private Foreign Source: Fabio Giambiagi and Fernando Montero, 2005; "O Ajuste da Poupança Doméstica No Brasil: 1999/2004”. Improving investment climate Structural and institutional reforms Increase competition Raise efficiency Lower risk Low costs Better risk x return Lower taxes and cost of capital Macro adjustment Greater demand and output More investment Quality of public spending A reform agenda • Fiscal policy trilema • Trade liberalization • Financial sector reform • Informality: tax, labor and business regulation • Jurisdictional risk Fiscal policy trilema Reduce public debt/GDP Lower taxes Increase public investment Public and SOE investment (% of GDP) 12 Decline in public investment lowered annual GDP growth by 0.4 p.p.* 10 8 6 4 2 Public sector Federal SOEs State & Munic SOEs (*) Pedro C. Ferreira and Leandro Nascimento, “Welfare and growth effects of alternative fiscal rules in Brazil”, EPGE/FGV, 2005. 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 1955 1953 1951 1949 1947 0 Gross tax burden (% of GDP) 40 35 30 25 20 Rise in tax burden lowered annual GDP growth by 1.5 p.p.* 15 10 5 (*) Pedro C. Ferreira and Leandro Nascimento, “Welfare and growth effects of alternative fiscal rules in Brazil”, EPGE/FGV, 2005. 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 0 Brazil’s tax burden: out of line with international standards Suécia 50% França 45% Israel Holanda Canadá Tax burden % of GDP 40% Alemanha Polônia Portugal 35% Reino Unido Espanha Austrália África do Sul 30% Austria Itália Hungria Brasil Dinamarca EUA 25% Bolívia Chile Japão Argentina 20% Singapura Coréia do Sul México 15% Venezuela 10% 0 2500 5000 Source: Khair (2003) 7500 10000 12500 15000 17500 20000 Per Capita GDP (US$) 22500 25000 27500 30000 32500 35000 50 20 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Public debt and interest payments (% of GDP) 70 6 60 5 Public debt 4 40 3 30 2 Interest payments 1 10 0 0 -1 Net Public debt (% of GDP) vs. per capita GDP (PPP) in 2002 110 Japão 70 Dívida pública líquida (%PIB) 50 Bélgica Itália 90 Brasil Alemanha Estados Unidos Espanha 30 Nova Zelândia 10 França Reino Unido Suéci Áustria Canadá Países Baixos Austrália Dinamarca -10 -30 Coréia Finlândia -50 -70 Noruega -90 5000 10000 15000 20000 25000 PIB per CAPITA (PPP) FONTES: Banco Mundial, OECD e Banco Central. 30000 35000 40000 Fiscal reform • Reduce public debt / GDP ratio: – Sustain a high primary surplus – Lower the cost of debt • Restructure public spending to accommodate rise in public sector investment • Reduce tax burden – Social security reform • Develop a medium-term fiscal framework that lowers political risk Fiscal accounts: Lower public debt / GDP 2004 2010 2015 Central government Reveneues (*) Primary expenditures (*) Primary surplus of central government 20.5 17.8 20.1 17.6 19.1 17.8 2.7 2.5 1.3 Total primary surplus Nominal interest payments Public sector borrowing requirements Net public debt 4.6 7.6 3.0 53.0 3.5 3.5 0.0 38.7 2.1 2.1 0.0 27.6 (*) Net of transfers to states and municipalities Allow for a rise in public investment Primary expenditures (*) Personnel Social security (INSS) Other expenditures (OCC) Primary surplus of central government Primary surplus of states and municipalities Primary surplus of state enterprises Gross tax burden (*) Net of transfers to states and municipalities 2004 17.8 4.9 7.1 5.8 2.7 2010 17.6 4.2 7.2 6.2 2.5 2015 17.8 3.9 7.2 6.7 1.3 1.0 1.0 0.8 0.9 0.1 0 35.5 35.1 34.1 Breakdown of Public Federal Expenditures (net of transfers to states and municipalities, % of GDP) 14 12 10 2.4 8 2.4 2.4 6 2.0 4 0.9 5.8 4.9 2 7.2 6.5 3.4 0 1991 1994 Private sector social security 1998 Retired 2002 2004 Personnel (active) Social security 0 Other social spending Korea Mexico Ireland United States Japan Slovak Republic Australia Canada Brasil Spain New Zealand Czech Republic Hungary Netherlands United Kingdom Portugal Greece Poland Italy Norway Finland Austria Germany Switzerland Belgium France Sweden Denmark Size and composition of public social expenditures 40 35 30 25 20 15 10 5 Social security expenditures versus % population over 65 Social security expenditures (%GDP) 18 16 Suiça Polônia 14 Itália Austria França 12 Brasil 10 Holanda Espanha Reino Unido Eslováquia 8 México Nova Zelândia 6 EUA/Austrália Canadá Irlanda 4 2 Japão Coréia 0 4 6 8 10 12 % population > 65 Sources: OECD, MoF/Brazil and World Bank. 14 16 18 20 Grauof de poverty pobreza ao longo do ciclolife de vida Rate through cycle 60 Porcentagem de pobres 50 40 30 20 10 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 Idade Age Source: Ricardo Paes de Barros, “O impacto de aumentos reais no salário mínimo sobre o grau de pobreza no Brasil”, apresentação no Congresso Nacional, Brasília, Dezembro 2004. 80 85 Social security reform • Minimum (sliding) retirement age for private sector • Elimination of differences in eligibility requirements for men and women • End of privileged retirement rules for teachers • De-linking social security benefits from changes in minimum wage Scenarios for social security and assistance expenditures (% of GDP) Year Scenarios C D 3,0 4,0 Per 0,0 capita GDP A 3,0 Per capita GDP B 3,0 E 4,0 F 4,0 0,0 0,0 No No Yes No No Yes 2004 7,8 7,8 7,8 7,8 7,8 7,8 2009 7,9 7,8 7,8 7,7 7,5 7,5 2010 8,0 7,8 7,8 7,7 7,5 7,4 2020 8,7 8,3 7,2 7,8 7,3 6,3 2030 10,0 9,2 6,9 8,4 7,4 5,6 GDP growth (%) Change in minimum benefit (%) Reform 0,0 Source: Giambiagi, Fabio; Mendonça, João Luis; Beltrão, Kaizô e Ardeo, Vagner; ”Diagnóstico da Previdência Social no Brasil: o que foi feito e o que falta reformar?”; Pesquisa e Planejamento Econômico, IPEA, dez 2004. Trade liberalization • • • • Macro reasoning Raise exports Lower exchange rate and interest rate risk Increase power of monetary policy’s exchange rate channel Lower cost of capital goods • • • • Micro reasoning Greater competition in oligopolized sectors Greater product diversity Access to modern technology Easier negotiations with Mercosur partners Sovereign credit ratings and trade flows (2002) (X+M)/PIB 100 Malásia Rating = 0.275+ 0.986 * (X+M) /PIB R2 = 0.42 (0.875) (0.175) 81 Hungria 62 Coréia do Sul 43 México Tailándia Polônia Chile 24 Filipinas Rússia Argentina China Brasil Índia 5 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 RATING 8.5 Credit ratings and ratio of external debt to exports of goods and non-factor services (2002) DEL / EXPORTAÇÕES 5.5 Argentina 5.0 Rating = 6.674 - 1.948 * DEL /X R2 = 0.95 (0.085)(0.070) 4.5 4.0 3.5 3.0 2.5 Brasil 2.0 1.5 Filipinas 1.0 Chile México 0.5 Rússia Polônia Tailândia 0.0 Índia Hungria Coréia do Sul Malásia China -0.5 -1.0 -1.5 -2.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 RATING 8.5 0 Singapore Belgiuma Belarus Moldova Netherlands Mongolia Slovenia Ukraine Libya Mauritius Trinidad and Tobago Tunisia Romania Botswana Malawi Korea, Rep. Switzerland Gabon Uzbekistan Senegal Paraguay Haiti Mali South Africab Russian Federation Congo, Dem. Rep. New Zealand Spain Uruguay Guatemala Cameroon Tanzania Bangladesh Uganda Burkina Faso 100 Central African Republic Rwanda (Exports + Imports)/GDP (%, 2003) 350 300 250 200 150 Brazil 50 Average nominal tariff (%, 2001-04) 30 Tarifa nominal média (%) 25 20 15 10 5 0 0 5000 10000 15000 20000 25000 PIB per capita (2004, $ PPP) Source: World Bank, WDI 2005. 30000 35000 40000 Bureaucracy in foreign trade: Exports Number of Number of Documents Signatures Time (days) OECD: High income 5 3 12 East Asia & Pacific 6 7 25 Latin Amer & Caribbean 7 7 30 Brazil 7 8 39 Chile 6 7 23 Korea 5 3 12 Source: World Bank, WDI 2005. Bureaucracy in foreign trade: Imports Number of Documents Number of Signatures Time (days) OECD: High income 6 3 14 East Asia & Pacific 10 8 27 Latin Amer & Caribbean 10 11 37 Brazil 14 16 43 Chile 8 8 24 Korea 8 5 12 Source: World Bank, WDI 2005. An Agenda for Trade Policy • Cut tariffs, unilaterally if necessary • Reduce discrepancy in protection and focus on more concentrated sectors • Overhaul import and export bureaucratic controls • Strengthen supporting technological institutions • Align domestic and foreign product specifications and regulations • Improve rail and port performance • Support investment in distribution in export markets Financial sector: Reforms • Price stabilization • Greater openness to foreign financial institutions • Improved bank supervision and regulation • Privatization of state banks • New bankruptcy law and credit information registries Financial sector: outcomes • Domestic credit is scarce, expensive and concentrated on short maturities • Pension funds, insurance companies and mutual funds invest mostly in public bonds • Stock markets are smaller and less liquid than in Asian and industrialized countries • Most firms and households finance themselves out of retained surpluses • Impact of financial sector on growth (and equity) well below potential 0 Source: World Bank, WDI 2005. Turkmenistan Liberia Sierra Leone Central African Republic Zambia Tanzania Venezuela, RB Syrian Arab Republic Rwanda Papua New Guinea Burkina Faso Turkey Jamaica Mexico Ecuador Peru Colombia Ethiopia Bangladesh Costa Rica Slovak Republic Latvia Oman 100 El Salvador 125 Uruguay Croatia Mauritius Tunisia Kuwait Norway Australia Sweden Ireland South Africa Hong Kong, China United States Domestic credit to private sector (2003,% of GDP) 250 225 200 175 150 Brazil (34,6%) 75 50 25 0 -10 Source: World Bank, WDI 2005. Netherlands Korea, Rep. Ireland Nepal Slovak Republic Sweden Chile Mexico Israel Philippines Lithuania Lebanon Slovenia Yemen, Rep. South Africa Egypt, Arab Rep. Oman Azerbaijan Indonesia Nigeria Bosnia and Herzegovina Germany Venezuela, RB Trinidad and Tobago Argentina Nicaragua Peru Lesotho Tanzania Liberia Mozambique Gabon Central African Republic 60 Kyrgyz Republic Haiti Malawi Uruguay Angola Interest rate spreads (percentage points, 2003) 80 70 Brazil (45.1%) 50 40 30 20 10 Spread decomposition (%) Total Private Banks Public Banks 0.2 0.3 0.3 Administrative Cost Cost of reserve requirements Taxes 28.3 22.5 38.3 8.3 9.8 7.2 12.3 12.8 11.8 Losses with default 27.3 25.4 30.4 Bank net margin 23.5 29.4 12.0 Cost of deposit insurance Source: Ana Costa and Márcio Nakane (2004), “Revisitando a metodologia de decomposição do spread bancário no Brasil”, paper presented at the seminar Economia Bancária e Crédito, Banco Central do Brasil. Financial sector diagnosis Incomplete macro adjustment raises interest rates, market volatility and jurisdictional uncertainty State role in mobilizing and allocating savings dampens the impact of financial intermediation on capital productivity There is insufficient competition among financial institutions High tax burden penalizes financial intermediation, encourages companies not to go public, and fosters fiddling with company accounts Information available to creditors and minority shareholders is very poor Informal firms: Services considered important Management training Self employed 10 Technical assistance 5 9 Legal assistance 3 5 Accounting assistance 3 10 Support for commercialization 24 28 Professional training 39 42 Credit 55 58 Source: IBGE. Employer 20 Informal firms: Bookkeeping (%) Self employed Employer Does not keep records 57 21 Records by him/herself 36 35 Accountant keeps records 6 43 Other 0 1 Source: IBGE. Financial sector diagnosis (cont.) Legal and judicial protection to creditors and minority shareholders is weak Repossession of collateral is slow and uncertain Low protection against public and private expropriation raises the preference for short-term and liquid financial assets, discourages financial intermediation and raises the cost of capital Savers often either reinvest their savings or keep them abroad in safer jurisdictions An agenda for the financial sector • Complete macroeconomic adjustment • Reduce taxation on financial intermediation (and overall) • Foster competition among financial institutions: – Improve quality of information, facilitate repossession of collateral, give clear mandate to competition agencies • Reform judicial procedures and educate judges • Reduce role of the state in mobilizing and allocating financial savings Informality • High tax burden • Complexity of tax system • Labor market regulation: excessive employment protection and high social contribution charges • Too much bureaucracy in business regulation 0 Slovenia Kazakhstan Estonia Cambodia Azerbaijan Uzbekistan Macedonia, FYR Malaysia Russian Federation Czech Republic Tajikistan Bosnia and Latvia Croatia India Indonesia Hungary Philippines Georgia Eritrea Slovak Republic Kyrgyz Republic Bulgaria Nicaragua Serbia and Montenegro Armenia Honduras Bangladesh Lithuania China Albania Ecuador Turkey Ukraine Algeria Pakistan Belarus Uganda Senegal Romania Moldova Guatemala Zambia Poland Kenya Tanzania Ethiopia Brazil Tax rates as a major investment constraint 90 80 70 60 50 40 30 20 10 Source: World Bank, WDI 2005. Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate Surveys who ranked tax rates as a major or very severe investment constraint. Burdensome and complex tax system Total tax payable (% of gross profit) Time to comply (hours per year) OECD Countries 46.1 192 Latin Amer & Caribbean 52.8 529 Brazil 147.9 2,600 Chile 46.7 432 Korea 29.6 290 Source: Doing Business 2006. Note: Measures the effective tax that a medium size company must pay in the second year of operation (except for labor taxes) as well as time spent to comply with tax requirements. The total amount of taxes is the sum of all the different taxes payable after accounting for deductions and exemptions. The taxes withheld but not paid by the company are not included. 0 Kazakhstan Azerbaijan Uzbekistan Armenia Tajikistan Slovenia Russian Federation Czech Republic Georgia Latvia Estonia Kyrgyz Republic Ethiopia Macedonia, FYR Eritrea Moldova Croatia Ukraine Cambodia Nicaragua Serbia and Montenegro Albania Hungary Slovak Republic Bulgaria Romania Lithuania Turkey Bosnia and Herzegovina Belarus Bangladesh Uganda Tanzania Algeria Ecuador Honduras Malaysia Pakistan Senegal Guatemala India Zambia China Kenya Philippines Poland Indonesia Brazil Labor regulation as a major investment constraint 60 50 40 30 20 10 Source: World Bank, WDI 2005. Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate Surveys who ranked labor regulations as a major or severe constraint. Labor market regulation Brazil Average by income level Low Medium High Employment laws (contractual flexibility, conditions of employment and job security) 2.4 1.6 1.7 1.2 Industrial relations (freedom and influence of unions, participation in company management and protection in strikes) 1.9 1.1 1.4 1.1 Social security (retirement, sickness and unemployment benefits) 1.7 1.1 1.8 2.2 Source: Juan BOTERO et al., “The Regulation of Labor”, NBER Working Paper No. 9756, 2003. Average time spent on (in calendar days) Dealing with licenses * Latin America and Caribbean OECD countries Starting a business 206 63 150 19 Brazil 460 152 Chile 191 27 Korea 60 22 Source: Doing Business 2006. (*) Procedures required for a business in the construction industry to build a standardized warehouse. These include obtaining all necessary licenses and permits, completing all required notifications and inspections and submitting the relevant documents to the authorities. Doing Business also records procedures for obtaining utility connections, such as electricity, telephone, water and sewerage Informal firms: Municipal or state license (%) Yes Self Employer employed 19 52 No 79 38 No answer 2 11 Source: IBGE. Jurisdictional uncertainty • The “risk of acts of the Prince changing the value of contracts before or at the moment of their execution”, which, as is the case with court rulings, “manifests itself predominantly as an anti-saver and anti-creditor bias”. • Raises risk, shortens maturities, increases the preference for liquid assets and encourages savers to keep their wealth in safer jurisdictions • Discourages investment in transaction specific assets Agenda to increase jurisdictional certainty • Reduce policy uncertainty • Complete regulatory reform in infrastructure • Strengthen regulatory agencies in infrastructure and financial markets • Central Bank (formal) autonomy • Reduce judicial activism • Strengthen competition 0 Azerbaijan Slovenia Estonia Kazakhstan Czech Republic India Hungary Malaysia Tajikistan Uzbekistan Latvia Uganda Philippines Senegal Eritrea Russian Federation Tanzania Armenia China Lithuania Kyrgyz Republic Croatia Macedonia, FYR Ethiopia Cambodia Pakistan Bosnia and Herzegovina Romania Georgia Slovak Republic Bangladesh Ukraine Honduras Serbia and Montenegro Indonesia Albania Kenya Turkey Moldova Zambia Nicaragua Belarus Poland Bulgaria Ecuador Guatemala Peru Brazil Policy uncertainty as major investment constraint 80 70 60 50 40 30 20 10 Source: World Bank, WDI 2005. Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate Surveys who ranked economic and regulatory policy uncertainty as a major or very severe investment constraint Summing up Low investment due to: High cost of capital Heavy taxation Substitution of current for capital spending in public sector High macro and jurisdictional risk Structural and institutional reforms remain incomplete New problems: higher taxes and weaker property rights (judicial activism, crime etc.) Summing up Macroeconomic adjustment remains critical Reforms are interconnected: complementarities and synergies are important (tax, judicial etc.) Politics matters Role of bureaucracies in fostering reform and developing institutional framework Can a mid-term reform framework play the coordination role expected from “leaders”?