Archive | July, 2011

Brazil’s Financial Position as U.S. Edges toward Default

27 Jul

With the U.S. teetering at the precipice of default, countries around the world are struggling to understand how they might be affected. Brazil’s current economic situation is a mixed batch: on the one hand, it is stable and flush with reserves (about US$350 billion); on the other hand, investors looking to diversify out of the dollar may be lured to the Brazilian markets because of the country’s high interest rates, putting further pressure on the much sought Brazilian Real. While undoubtedly a downer for the manufacturing sector, a stronger Real might bring about the conditions needed for long-awaited tax and labor reforms to occur.

A Strong Real, the Dollar, and Inflation

The first semester of 2011 saw more than R$30 billion surge into Brazil, looking to cash in on some of the highest real interest rates in the world. This amount even compensated for Brazil’s trade deficit, which has gone strongly negative because of high domestic demands for imports, driven by the surging Brazilian Real.

Investors have forced up the Real’s value, but so too have continuous demands for Brazil’s commodities (driven mainly by China)— the currency has appreciated by more than 35 percent since 2005. Ironically, the government’s principal means of combating inflation—now running at 6.5 percent—is to raise interest rates, which further increases the flow of investment money into Brazil, putting upward pressure on the Real. Today, the Real hit the highest level in more than 12 years relative to the dollar.

Interestingly, just as the international markets appear to be dumping dollars, many Brazilians have been doing just the opposite. My mother-in-law had to order dollars a week in advance; the strong Real and uncertainty about inflation is prompting many Brazilians—ironically—to buy dollars.

Manufacturing Sector Ekes out a Margin while Government Gets Fatter

As a result of the strong Real, Brazil’s manufacturing sector is getting hit hard on exports. The commercial deficit, which excludes construction, public utilities, and commodities, was R$30.4 billion in 2010, reports today’s Estado de São Paulo. Luckily, the internal market is strong and high-tariff walls still serve to protect Brazilian industry from foreign competitors.

Yet just as the manufacturing and industrial sectors are feeling something of a squeeze, the government is posting record revenues on taxes. Today, the Estado de São Paulo reported that government accounts are up 123 percent over the same period last year. Remember, of course, that last year was an election year, and President Luiz Inácio Lula da Silva was spending prodigiously to ensure his anointed successor’s victory. Last year the government went into the red, making this year’s surplus—relative to the same period last year—more comprehensible and, indeed, less impressive.

But revenues appear to be up also because of record tax receipts— almost 20 percent more than last year’s first semester, according to the same Estado de São Paulo report cited earlier. The windfall in tax dollars may be a result of the increased consumption of imports, whose tariffs pay out handsomely for government, and from higher income tax revenues, the product of an increase in real wages— a higher minimum wage and wage inflation.

Current financial windfalls put the government in a strong position to spend more money. After having paid off most of President Lula da Silva’s pre-election debts, Rousseff is apparently eager to do just that— plough dollars into infrastructure and social programs.

Demands for Tax Reform

Yet even as government luxuriates in its newfound wealth, the total tax burden continues to rise in Brazil. It now hovers around 35 percent of GDP, about 10 percent higher than it was when Brazil approved its democratic Constitution in 1988. Taxes in Brazil are now the highest in the hemisphere.

The interesting thing about the simultaneous increase in taxes and the value of the real is that it has put greater pressures on business, particularly the manufacturing and industrial sectors, both of which have become less competitive both here and abroad.

Business, in turn, is understandably putting greater pressure on government for reform. Several organizations have launched campaigns for reforms, as exemplified by this tax-protest video by Brazil’s Federal Confederation of Industry. Taxes and bureaucratic procedures that used to be taken for granted are now being examined with a more critical eye by business, a sector keen to exploit efficiencies. Corruption and waste have also come under the microscope, phenomena that make a high tax burden and rigid bureaucratic imperatives all the more bitter to swallow.

Business owners regularly complain that if they were to comply with all tax and labor laws (which impose their own taxes), they would not be able to keep their businesses afloat. As it stands, the system encourages evasion, illegality, and informality. Tax reform has become a big issue, and President Dilma Rousseff has promised to send a tax reform to Congress one piece at a time. The odds are not good: former Presidents Fernando Henrique Cardoso and Luiz Inácio Lula da Silva both failed. What is sure is that the government needs to update burdensome, anachronistic policies that continue to jeopardize Brazil’s international competitiveness.

Reviewing the New Brazilian President’s 1st Semester: Policy

22 Jul

Sure, federal governments run the postal service, a military that doesn’t have a lot to do, and a few social programs, but what the heck are they good for anyways, besides causing a lot of bickering in Congress?

You’re not likely to find very good answers perusing the news. Look in any newspaper and you’ll see that headlines refer to conflict—the politics of policy make the news, not policy itself. Good policy analysis is difficult to find, which makes understanding what the heck goes on at the federal level a very difficult exercise indeed. Here is a brief overview of some of the more noteworthy policy outputs of the Rousseff administration during her first semester in office:

1. Raising the minimum wage:  I wrote about the raise back in February when it was enacted. The monthly minimum wage went from $510 in 2010 to $545 in 2011 (about US$345), a 6 percent raise. The rise in inadequate, given that Rio de Janeiro and São Paulo are considered among the world’s top 15 most expensive cities at the moment, and inflation is now growing at about 6.5 percent annually. On the other hand, full employment in Brazil is causing labor shortages and wage inflation, which may signal higher real wages. Most workers earn more than one minimum salary; construction workers who work as laborers, for example, earn approximately two minimum wages.

2.  Raising tax exemption rates: A correlate of adjusting the minimum wage is adjusting minimum rates for tax exemption. If you made less than R$1500 per month in Brazil, you were exempt from tax. For each year of the Rousseff government, this rate will increase by 4.5 percent, so in 2011 it is R$1556, and in 2012 it will be R$1637. The rate should theoretically keep pace with inflation, but it currently falls two points short. What this ultimately means is that if inflation continues apace, the government will be taxing more Brazilians each year if wages are adjusted for inflation. Paulo Pereira da Silva (PDT-SP) and the unions proposed an annual hike of 6.47 percent, but the government refused.

3. “Brazil Without Misery” or Brasil sem Miséria: A social program that involves expanding basic services, such as electricity, sanitation, literacy, and other basic public services. The program follows in the tradition of the famous Bolsa Familia championed by Lula (although originated by Fernando Henrique Cardoso), which provides cash transfers to families conditional on their children attending school. The scale of Bolsa Familia and its popularity in the poor northeast are widely viewed to have handed Lula his second presidential election victory. Brazil Without Misery may do the same for Dilma.

4. Creation of Limited Liability Employment: Previously, opening a company required having a partner, to create broader liability and accountability. Now, a single person can open a limited business. The only requirement is that the total capital outlays must equal or exceed 100 minimum salaries, in other words, R$54,500, or about US$35,000. Good for entrepreneurship and the formalization of the informal sector, but still a high capital requirement for most Brazilians.

5. The National Strategic Border Plan, or Plano Estratégico de Fronteiras: The plan is to fight cross-border crime, including arms, animal, and human trafficking, drug-smuggling, and environmental destruction. Announced in June and coordinated by various police forces, the armed forces, and the Ministry of Justice, the plan has generated little if any reporting.

A few Additional Good Policy Calls:

Putting an End to the Pão de Açucar-Carrefour Merger Fiasco:

The President effectively vetoed an embryonic plan hatched by the Grupo Pão de Açucar, one of Brazil’s largest grocers, and tentatively approved by the National Development Bank of Brazil (BNDES): to take over another of Brazil’s largest grocers, the French group, Carrefour. The resulting gorgon would have controlled about a quarter of the national supermarket industry, much to the detriment of other chains and consumers. BNDES has earned a reputation for fostering oligopolies; it funds a small group of privileged Brazilian firms—with taxpayer money at privileged rates—that then proceed to gouge Brazilian consumers. Until 2009 there was absolutely no transparency in the BNDES. The rationale behind the BNDES, apparently, is to fund Brazilian companies to be so large that they can compete on an international scale, notwithstanding their homegrown inefficiencies. According to various news sources, the BNDES President Luciano Coutinho fell out of Rousseff’s good graces after the Pão de Açucar-Carrefour episode.

Mass-Dismissals in the Department of Transport and Infrastructure (DNIT):

The carnage continues until today—more than 15 top officials of the DNIT have been pressured out of a job by the President’s Office, according to today’s Folha de São Paulo. As my last blog post conveys, Rousseff appears to be keen on sending a message to other allied-controlled Ministries: corruption will not be tolerated. Seven cases against DNIT officials have been opened by the Comptroller General. The Ministry of Tourism was the latest government agency to come under scrutiny. According to today’s Jornal Globo, the Ministry paid more than R$52 million for online courses provided by an NGO run by an ex-politico with several corruption cases on his record.

Joining the Open Government Partnership (OGP) as Co-Chair

Although it is questionable whether Brazil should qualify for the OGP, let alone serve as Co-Chair alongside the U.S. , this surprising commitment to open government at least sets up positive expectations. The most important pending issue is to approve the country’s long-awaited freedom of information law. Then active transparency has to be a focus, from tax transparency, transparency on environmental policy questions, to transparency on how public money is being spent. Open government also sets up the expectation for greater governmental open-data initiatives that may be leveraged by Brazil’s advocates, hackers and technologists.

Brazil’s willingness to join the Open Government Partnership is a decisive demonstration that Brazil is not “turning to the left” à la Hugo Chavez, but rather charting out its own pragmatic course. This route is unquestionably closer to the U.S. Not only is Brazil co-chairing the OGP alongside its Anglo-American neighbor, but the U.S. recently promised to lend its “full support” to Brazil in its quest to claim a seat on a reformed U.N. Security Council. The two American Goliaths are undeniable getting cozy with each other.

Reviewing the New Brazilian President’s 1st Semester: Politics

15 Jul

This past Wednesday night Dilma Rousseff threw a cocktail party to celebrate the end of her government’s first semester and the beggining of the National Legislature’s mid July break. According to LatinNews.com, 17 of 38 ministers made an appearance, as did the Presidents of both Chambers of Congress and the Vice President. The event began at 7:30, but by 9pm most invitees had already left. The lukewarm turnout and hasty departures reflect a palpable lack of enthusiasm for Rousseff’s performance after six months in power.

To her credit, the President has kept the economy buoyant while Europe and the U.S. tank, and she has added continuity to former President Luiz Inácio Lula da Silva’s achievements by expanding and inventing new social programs, such as the new Program to Fight Extreme Misery (Programa de Combate à Miseria Extrema). But apart from these significant bright spots, the President’s policy performance has been halting at best and weak at worst. Overall, the clearest trend has been to privilege the unity of her legislative coalition at the cost of policy priorities, ultimately making a success of neither.

The Coalitional Problem

Notwithstanding the largest majority coalition in Brazil’s democratic history, the president has had extreme difficulty ensuring congress’ support. Supposed allies have disobeyed and blackmailed Rousseff, weakening or delaying governmental policy priorities, particularly those critical to Brazil’s future sustainability and stability— Forestry Legislation (Código Forestal), the establishment of a Truth Commission, and the passage of a Freedom of Information Law, among others.

On the other hand, Congress has merrily passed measures to increase opacity in budgetary accounting, as was the case with decree 527/11, ostensibly designed to expedite contracting for the 2014 World Cup and 2016 Olympics. One of the few members of the congressional opposition, PSDB party leader, Aecio Neves, commented:

In all, absolutely all modern societies, transparency or the advance of transparency is seen as an instrument to defend [the rights of] society. Here we are taking a contrary path, employing the argument that we’re in a hurry, as if we had just now discovered, over the last couple of months, that we would host the World Cup and the Olympics.

The Corruption Problem

Despite Congress’ role in obstructing the President, resisting transparency, and supporting opacity, it has predictably blamed the President for a lackluster first semester. “In this first semester,” according to the President of the Senate, José Sarney, “the crises that emerged were all within the Executive.”

It is true that Rousseff has had to replace no less than four ministers in her first six months in office, including two as a result of major corruption scandals. First to go was Antonio Palocci, the President’s Chief of State and congressional fixer. It was the Folha de São Paulo that discovered a multiplication of 20 in the político’s net worth over four years. Apartments and other assets had been registered under false names.

Second was Rousseff’s Transport Minister, Alfredo Nascimento, a coalitional cabinet posting for the PR, an important ally. Nascimento’s ministry and PR congressional leaders had skimmed untold amounts from the massive public transport projects in advance of the 2014 World Cup and 2016 Olympics. Nascimento then had the gall to ask Rousseff for an additional $6.5 billion because of budget shortfalls.

While the Transport Minister’s entourage was forced to resign, it appeared that Nascimento himself had escaped the axe. Then it was discovered that the net worth of the Minister’s son had increased from somewhere under US$130,000 to around US$20 million in a matter of a few short years. The Minister’s resignation—which Rousseff should have ordered from the very beginning—soon followed suit.

It is widely suspected that the leak responsible for this scandal originated within the President’s sphere of influence. Rousseff is viewed to support a housekeeping of corrupt rent-seekers, many of whom, like Nascimento, are hangovers from President Lula’s two administrations. When Rousseff finally did choose a replacement minister for Nascimento, the PR appeared to be unhappy with choices made; this past Wednesday it boycotted a lunch for PT allies in the Lower House.

The need to pander to congressional allies is the critical reason Rousseff has not acted with greater decisiveness. Some, including the author, originally thought that what Rousseff lacked in negotiating ability, she would make up for in fearsome authority. Yet with congressional legislators disloyal to ideology and local constituencies, negotiation through pork and positions seems to be one of few alternatives.

Rousseff’s decision not to spend last year’s residual budget funds is illustrative of what can happen when legislators are denied resources. When Rousseff refused to release funds for pork barrel spending, the Lower House conducted a boycott; not even her own party would vote for critical health legislation until Rousseff caved-in, disbursing the US$3 billion she had sought to save taxpayers. Such defeats illustrate that Rousseff still has much to learn about legislative hardball.

Next post will review Rousseff’s performance on policy.

The Open Government Partnership–A New Direction for U.S. Foreign Policy?

12 Jul

The U.S. and more than 50 other countries met today to discuss a new international initiative to promote open government around the world, the Open Government Partnership (OGP). The aim is to create a multinational, multi-stakeholder compact to advance openness, accountability, transparency, and good government. The OGP is to be announced at the inauguration of the United Nations in September of this year. While the OGP appears to be a promising means of advancing the human condition, it immediately raises a few conceptual and methodological points of contention, as well as a few critical questions about the direction of U.S. foreign policy.

What

First written-up in November 2010, the Partnership was initially to be co-chaired by the U.S. and India, but India is now out and Brazil is in. Like much about the initiative, the reason for this switch remains hazy, but what is known is that it will involve upwards of 50 countries, and will be led by a “Multi-stakeholder International Steering Committee” comprised of governments from Brazil, Indonesia, Mexico, Norway, the Philippines, South Africa, the United Kingdom, and the United States, and more than 60 civil society organizations from around the world. Notably, one of the original catalysts for the OGP, India, is missing from the group. Today’s July 12th inaugural meeting was closed to the press save for the opening and closing remarks.

Criteria for being part of the Open Government Partnership (OGP)

Documents provided by the initiative establish four criteria for eligibility, based on a 16-point index wherein countries must meet a minimum membership threshold of 12 points. The criteria, judged by “an independent group of experts,” comprise the following categories:

a) Fiscal Transparency (4 points: 2 points for executive’s budget proposal, and 2 points for audit report)

b) Access to Information (4 points: 3 for constitutional provision, 1 for draft law)

c) Disclosures Related to Elected or Senior Public Officials (4 points)

d) Citizen Engagement (4 points)

Is Brazil Fit to Co-chair the OGP?

The scoring is apparently somewhat tricked-out. Brazil, the co-chair of the OGP, still has not passed an access to information law (freedom of information), and as I have written about extensively in other posts, resistance to openness has been a prominent feature of politics in both Congress and the Presidency. Notwithstanding the historical record, Brazil scores 15 out of 16 points. On access to information, Brazil scores 2 points for possessing a constitutional provision for public disclosure. It scores an additional point for having a draft access to information law, which is now being considered in Congress. Thus on this criterion Brazil scores almost full points, even though its constitutional guarantee to access public information is effectively impracticable without comprehensive regulation (a freedom or access to information law) and the draft law has been stuck in Congress since 2009. A recent bill to conceal dollar numbers on procurement contracts for the 2014 World Cup and 2016 Olympics has also apparently been glossed over, as has Brazil’s somewhat dysfunctional Transparency Portal— Brazil’s earns full points on fiscal transparency.

The question that should be on everyone’s minds is whether Brazil is fit to co-chair the OGP, much less whether it should qualify for the OGP in the first place. If the OGD adopts these sorts of permissive benchmarks before its formal inauguration, much less makes a co-chair of a country not leading on transparency, can we expect the OGP to be anything more than feel-good window-dressing?

A New Direction in U.S. Foreign Policy: Backdoor Democracy Promotion?

Clearly, the idea of openness is good business for U.S. foreign policy. The United Nations has proven an unsatisfactory arena for collective action, precisely because of the chasm between authoritarian regimes and democracies. Alternative international arrangements are difficult to come by. The idea of a new “League of Democracies” or some other formulation has been tossed around over the years, but benchmarks for distinguishing real democracies from sham democracies are tricky. Moreover, the U.S. does not want to set up an “us versus them” collectivity that might offend authoritarian allies, such as Saudi Arabia and the monarchies of the Middle-East, among others.

A multinational collectivity of countries devoted to the cause of “openness” is appealing precisely because of its inoffensiveness. Countries may want to be a part of this initiative, and there may be economic upsides to doing so, such as technology and knowledge transfers, preferred diplomatic treatment, and public relations bragging rights.

As fellow blogger David Sazaki and I recently discussed (and he recently wrote about), while openness may help advance the human condition by providing greater freedom, as well as access to information, education and technology, it also smacks of backdoor democracy promotion. A bad thing? Not on the face of it, but as with democracy promotion, the ever-present danger is a double-standard: ‘open’ status for our friends even if they do not credibly meet minimum requirements.

Breaking Open the BRIC (Brazil, Russia, India, China)?

Yet ‘openness’ is a strategic concept that may help achieve several instrumental goals. First, it may “break open the BRIC” by creating a dividing line between the great emerging economic powers—the democratic governments of Brazil and India on the one hand, and the two authoritarian giants on the other, Russia and China. By consolidating strategic alliances with Brazil and India, the U.S. pulls two major regional players into its sphere of influence, and isolates authoritarian regimes reluctant to engage in real openness.

It may also bring about democracy. Some may remember the term ‘Glasnost,’ a rough equivalent of ‘openness’ in Russian. It was one of Mikhail Gorbachev’s key liberalizing policies, designed to assuage pent up disshttp://en.mercopress.com/data/cache/noticias/26935/0x0/bric.jpgent. It also opened the floodgates for the greatest democratic transition of the Twentieth Century. The concept has the potential to do the same in countless other places, such as China, Russia, and Iran. It would be difficult to imagine real openness not leading to democratic change, and for this goal it may prove a valuable instrument in the evolving toolbox of U.S. diplomacy.

It may prove equally valuable in achieving a long-coveted goal of the U.S.—opening markets. The U.S. has more free trade agreements than any other country in the world—about a dozen in the Americas alone, if the CAFTA and NAFTA are taken into account. Brazil was not chosen to co-chair the OGP by hazard. Opening-up this continental country would be bonanza for U.S. companies. It is not only a young, growing market of more than 190 million consumers, but in most areas outside of commodities, Brazilian companies are uncompetitive compared to their U.S. equivalents. It’s not surprising why: most Brazilian industry hides behind efficiency-eroding tariff walls, public officials engage in sweetheart deals with local firms, and doing business in Brazil is little less than a Kafkaesque adventure in bureaucratic entanglement. By encouraging an ‘opening’, market-minded Brazilians and lobbyists could make a greater case for reforms to alleviate these obstacles. The U.S. might gain access to Brazil’s coveted consumer markets, procurement contracts, and the country’s abundant natural resources, including oil.

The extractive industries are a particularly salient focus for the OGP, as with other large international campaigns for transparency and accountability, such as the Transparency & Accountability Initiative. The rationale behind this focus is rather evident. As I discussed last post, there is a strong association between mineral-wealth, inequality, corruption, and authoritarianism—exactly the types of pathologies the world’s progressive countries are trying to prevent.

The Metaphor of Openness

Openness is vulnerability. By contrast, the first rule of international relations and politics more generally is self-preservation: defense, blame-avoidance, and distrust. To engage in real opening will imply overcoming these basic political instincts, a monumental challenge that will require a cultural change spanning decades, if not centuries. Transparency and freedom of information initiatives across the world are still young, and the OGP is a promising exploration of whether nations are strong enough to be vulnerable.

But the will to openness may not be completely self-determined. Certainly, the Arab Spring of 2011 demonstrates that ‘opening’ may be forced. The revolutions that occurred across North Africa and the Middle-East used the purported tools of openness–social media and technology–as a means to an end. Technology is instrumental in this sense; it effectively helped citizens overcome collective action dilemmas, and gave voice to demands for freedom against terrible odds. As fellow bloggers have pointed out, technology is an excellent instrument for shaming governments and expressing anti-system sentiment, but will it prove equally vital in constructing valuable structures of openness?

Regardless of what the skeptics say, if there was ever a time in history to launch an international open government partnership, this is it. Historically, it’s a highly atypical diplomatic initiative: unideological, nonexclusive, engaged with all levels of government and society, and diffuse—it’s a heck of a promising initiative, if it turns out to be for real.

Bolivia and its Lithium: The Next Saudi Arabia? (via The COHA Blog)

5 Jul

Bolivia and Brazil seem to have this conundrum in common: both are on the verge of massive mineral wealth– Brazil with oil, Bolivia with Lithium–and both are still emerging democracies with spotty, if not weak governmental institutions.

A book by Terry Lynn Karl of Stanford University called “The Paradox of Plenty” does a noble job of explaining why countries with ample mineral wealth paradoxically tend to become refuges for corruption and inequality, a la Nigeria, Venezuela, Angola, Russia, Sierra Leone, Liberia, and so forth. One might add that countries with limited experiences with democracy and inchoate or weak institutions may be more susceptible to the afflictions of corruption and inequality. This is a great post by the Council on Hemispheric Affairs.

Bolivia and its Lithium: The Next Saudi Arabia? Bolivian Salt Flat Salar de Uyuni According to Bolivian Aymara legend, there once lived a Vulcan Goddess whose breast had grown tired from nurturing her suckling babe.  To relieve her sore nipple, she ripped the child from her teat, and out poured a deluge of milk, which promptly mixed with her tears as the flow spilled across the landscape.  While her actions in this legend may have been hasty, they created the lithium rich Salar de Uyuni, a 10, … Read More

via The COHA Blog

The Costs of Rousseff’s Coalition Continue to Mount

4 Jul

The price of majority consensus in Congress is rising as the Rousseff administration muddles through yet another ugly compromise with allies.

Over the past week, the magazine Veja broke a story about how political bosses within the Ministry of Transport have siphoned-off large amounts of cash, approximately 4 to 5 percent of total funds earmarked for projects. The Minister of Transport, Alfredo Nascimento, is not from Rousseff’s PT party, instead he represents the PR, an important coalition ally in Congress.

Leadership Lacunae

When corruption scandals of this magnitude surface, the usual response is for leaders to resign or be forced out. However, when the minister is from a key party in the President’s governing coalition and this party’s legislators and leadership are implicated in the siphoning scheme, the choice is either to slap a few wrists and keep the coalition together, or let heads roll and risk losing support and majority dominance. Rousseff forced out most of Minister Nascimento’s subordinates but the boss himself has stayed.

Rousseff’s response undermines leadership– hers and Nascimento’s both. If all those around the Minister were engaged in embezzlement, there is no question whose head should have rolled to set things straight up top. Nascimento has run the Ministry since 2004. Today Globo issued a special report on the long legacy of corruption within the Ministry of Transportation.

Driving Out of Control?

Rousseff has complained, according to Veja, that the Ministry of Transportation is “without control”; prices of highways and other projects have been dramatically “inflated”. Ironically, Nascimento has entreated Rousseff for an additional $10 billion Reales (about $6.5 billion dollars) to make up for shortfalls.

The opposition is calling for a congressional investigation, or at the very least a ministerial resignation. But Rousseff remains unmoved, even despite other recent episodes that have cast doubt on government’s commitment to greater accountability and transparency.

During the past two weeks Rousseff waffled on her support for a freedom of information bill awaiting definitive approval in the Senate (41/2010). She alternately supported and then denied demands for its delay and weakening–again, it was coalition allies that the President sought to appease.