Paulo Guedes hopes for fiscal reform and privatization proposals in 2020

On July 5th, Paulo Guedes, ministry of economy in Brazil, gave an interview to CNN Brazil and spoke about his expectation on fiscal reform and privatization proposals still in 2020. He explained that fiscal reform was a priority to the current administration, but the crisis of covid-19 redirected attention to solving issues of population’s health, employment and income. To him, current crisis projections of 10% PIB reduction of need to be reconsidered to a 6% fall, since the country’s exports were kept within good performance throughout the crisis.

Regarding fiscal reform, Guedes explained that a broad proposal will be presented to congress still in 2020. His intention is to broaden the bases of tax incidence with lower tariffs, easening the burden on labour taxation and, consequently on businesses. One of his proposals is to create an IVA tax (tax over aggregated value), and taxing digital services, but congress has not engaged in this digital taxation debate.

Guedes expects to advance on privatization projects in the sectors of electricity, water & sanitation, oil & gas, and coastal navigation. He looks at the subsidiaries of the state bank Caixa for a large IPO proposal. The expectation is that the privatization program also includes companies such as Eletrobras, Correios, EPL, Valec, EBN and Infraero.

However, according to the political analyst Thiago de Aragao, foreign investors do not expect Guedes’ privatization program to take off as quickly as expected by the minister, despite his good will and intentions. This common delay seen in the brazilian market is due to the complex institutional arrangement in the country, seen somewhat as a form of mechanism in place to validade and balance interests.

Ultimately, the positions of delegates in the national congress need to be assessed to further understand the likelihood of some of these privatizations. Whereas articulations for privatization of Eletrobras seem to be very unclear in congress, the recent approval of the sanitation law (PL 4.162/2019, waiting for sanctioning) opens up to new opportunities.

References

Estadao. O que o mercado precisa saber sobre as ultimas declaracoes de Paulo Guedes. Published on July 06 2020 by Isaac de Oliveira. Available at: https://einvestidor.estadao.com.br/mercado/ultimas-declaracoes-paulo-guedes/. Access on: July 11 2020.

Estadao. Investidor estrangeiro ve como irreal promessa de Guedes de 4 privatizacoes em 90 dias. Published on July 09 2020 by Thiago de Aragao. Available at: https://einvestidor.estadao.com.br/coluna/thiago-de-aragao/guedes-privatizacoes-investidor-estrangeiro/. Access on: July 11 2020.

Senado. Novo marco legal do saneamento basico aguarda sancao presidencial. Published on June 26 2020. Available at: https://www12.senado.leg.br/noticias/videos/2020/06/novo-marco-legal-do-saneamento-basico-aguarda-sancao-presidencial. Acces on: July 11 2020.

2019 Global Economic Outlook: World Bank Report

The World Bank released its 2019 Global Economy Outlook in January this year. In this post I try to highlight the key facts and information from their press released and patially from the report as well.

Global Summary

  • International trade and manufacturing activity have slowed down.
  • Intensifying trade tensions could result in even weaker global growth and disrupt global interconnected value chains.
  • Borrowing costs for emerging and developing economies have increased.
  • Uprising in commodity exporters has stagnated and activity in commodity importers is decelerating.
    • Energy prices have fluctuated, mainly due to supply factors.
    • Other commodity prices have also weakened – particularly metals – posing further challenges to commodity exporters.
  • Past increases in public and private debt could heighten vulnerability to swings in financing conditions.
    • Debt vulnerability (debt-to-GDP ratio) is rising in low-income countries.
  • Maintaining low global inflation may become a challenge as long-term factors that helped reduce inflation in past decades may lose momentum.
East Asia and Pacific remains one of the world’s fastest developing regions. Regional growth expected at 6% in 2019.
  • China 6.2%
  • Indonesia 5.2%
  • Thailand 3.8%
Europe and Central Asia. Financial stress in Turkey is weightening down regional growth, expected at 2.3% in 2019.
  • Turkey 1.6% (due to high inflation, high interest rates and low market confidence)
  • Poland 4%
Latin America and Caribbean. Regional growth is expected at 1.7% in 2019.
  • Brasil 2.2% (assuming fiscal reform is quickly put in place).
  • Mexico 2%
  • Argentina -1.7% (as deep fiscal consolidation leads to loss of employment and reduced consumption and investment)
Middle East and North Africa. Regional growth expected to rise to 1.9% in 2019. Domestic factors such as policy reforms are promoting growth in the region. Oil exporters expected to pick up slightly and GCC countries expected to grow 2.6%.
  • Iran -3.6% (due to sanctions)
  • Algeria 2.3%
  • Egypt 5.6% (as investments is supported by reforms and consumption picks up)
South Asia. Regional growth expected to accelerate tp 7.1% in 2019, by strenghtening investment and robust consumption.
  • India 7.3%
  • Pakistan 3.7%
  • Sri Lanka 4%
  • Nepal 5.9%
Sub-Saharan Africa. Regional growth expected to accelerate to 3.4% due to diminished policy uncertainty.
  • Nigeria 2.2% (assuming that oil production will recover)
  • Angola 2.9% (assuming that oil sector recovers)
  • South Africa 1.3% due to constraints on domestic demand and unlimited government spending.

The United States remains stable due to fiscal stimulus and better than expected domestic deman, with GDP growth projected at 2.9% in 2019. Growth in the European Union, on the other hand, is weaker than expected at 1.6%, due to slowing exports and as monetary stimulus is withdrawn.

Source: World Bank Press Release

2019 Economic Outlook Brazil: Infrastructure and Reforms

On February 4th, the Brazilian President Jair Bolsonaro delivered the yearly Message to National Congress, in its opening ceremony for the 2019 legislative year. This article is based solely on the official document, which is divided in five main chapters: Economy, Infrastructure, Society, Strategic Issues, and Public Administration. It covers highlights related to macroeconomic reforms and infrastructure. And a second post containing highlights related to Strategic Issues and Foreign Policy will follow.

Economic Overview

  • The country ended 2018 with a deficit of USD 14 bi for 12 months (0,7% of GDP).
  • Exports were impacted by the economic crisis in Argentina. However, soy exports to China increased in the second semester due to restrictions derived from US-China trade tensions.
  • The report states that the country faces low external vulnerability as a result of its international reserve volume (USD 380 bi) and the flow of its direct foreign investment.
  • Labour market still experiences high rates of unemployment, but shows slow recovery.
  • Macroeconomic reforms are proposed for social security, fiscal system, public administration, foreign trade liberalization, privatization, and the autonomy of Central Bank.

Fiscal Reform

Brasil faces two major problems in its fiscal system. First is the high tax rates, which can reach 33% of GDP. This is above the other emerging economies and other Latin American countries, which average 20% of GDP). Secondly, its tax system is highly complex. This demands high resources from both private and public sectors, and generates high levels of litigation disputes due to uncertainties. Current fiscal reform proposals are limited to measures that seek to simplify enforcement, reduce tax cost liability and reduce the cumulative effects of some federal taxes. The message also states the continuity of the New Fiscal Regime (or, NRF – Novo Regime Fiscal), introduced by the Constitutional Amendment No. 95, of December 15, 2016, which is relevant for the fiscal rebalancing of the Federal Government. This regime, also called the “spending ceiling” (teto de gastos), established a limit for federal primary expenditure.

Social Security Reform

Payment of Social Security benefits has been the main factor responsible for the increase in total public spending in the last 20 years. In addition, the growth of pension transfers tends to accelerate due to the rapid demographic transition that the country is experiencing. The fertility rate fell considerably between 1980 and 2015, from 4.1 to 1.7 children per woman, which implies lower population growth in the future.

Infrastructure

One of the main problems is the lack of intermodal infrastructure allowing for connections between the national network of seaports to other modes of transportation (road, rail and river). It is necessary to reduce costs by improving port efficiency, which implies integration with the railway and road networks, linking the main regions of the country. It is also imperative to reduce costs and deadlines for boarding and disembarking. The goal is to reach performance levels of ports in countries such as South Korea (Busan port), Japan (Yokohama port) and Taiwan (Kaohsiung port).

The Government plans to launch dredging and land infrastructure projects, as well as completing other projects that will increase its seaport infrastructure capacity by 11.25 million tons /year, 4.11 million tons mĀ³ /year, 250 thousand TEU /year, 13 thousand passengers /year and 50 thousand vehicles /year. The immediate goal is to auction ten port terminals in order to expand current capacity.

In 2018, a bidding announcement was issued for the 30-year concession of 12 airports in the Northeast, Southeast and Mid-Western regions. For the next years, it is projected the continuity of the airport concessions through the release of other bidding blocks.

Its road network, has not received the volume of investments needed for keeping up with the economic activity. Recent surveys indicate that only 38% of the segments are classified as being of good or better conditions. The government estimates USD 7,08 bi in investments for the next 5 planned concessions, which will comprise around 5,000 km of highways.

Source: Mensagem ao Congresso Nacional 2019

The Economics of China’s New Era – Prof. Lin from Peking University

Prof. Justin Yifu Lin from Peking University delivered a lecture to a full auditorium at Goethe University (Frankfurt, Germany) on the new Era of the Chinese Economy, on this Jan. 21st. The event was made possible by IZO, the Interdicsciplinary Eastern Asian Studies, on its 10th year aniversary. Professor Lin acquired his PhD from the University of Chicago, and was the Chief Economist of the World Bank between the years of 2008 and 2012, currently working as a professor at Peking University.

Prof Lin started his talk by reminding us of how, 40 years ago, China started its reforms and openned up to the global economy. In 1978, China’s GDP per capita was 156 USD a year, according to the World Bank. Back then, 90% of its production was not linked to global production. However, nowadays, China is considered to be the second largest economy in the world, the largest exporter, and the largest trading country in the world. In 2018, the country reached 9.740 USD GDP per capita.

“China has entered a new era”, stated Prof. Lin, questioning about the implications of such transformation. According to him, people will have different interpretations, but his talk was to give voice to his own. He continued by acknowledging that the Chinese growth in recent decades was very impressive, especially if you compare it to other traditional economies in the Western world, that collapsed with the forces of the global crisis. Meanwhile, China mantained its stability and continues presenting itself as the only country in the world that did not experience a financial crisis in the last 40 years.

Prof. Lin considers this phenomenon a result of a pragmatic gradual reform in the Chinese economy, and he believes that these reforms will continue to be taking form on the long run, in order to maintain stability. He also believes that the secret behind the the country’s economic stability was its competitive advantage in specific sectors of the economy.

But China also paid some costs. The Chinese economy grew alongside with widespread corruption and income disparity in the country, and the Chinese people are not happy with these two factors, creating great social discontent.

But even after 40 years of continuous economic growth, China still has huge potential. According to him, developing countries have the “late comers advantages” – you can input technology by buying new technology from developed countries. This explains why China could achieve the high growth rates. A high income country already has the highest income, productivity and technology in the world. They would have to invent the new technologies. But new inventions require huge capital input, and are of high risk.

He mentioned that a study done in 2010 showed that there’s a potential for China to achieve 8-9% growth until 2028. Now it’s 2019, so there’s still 10 years of this potentil growth. But in a scenario where the global economy doesn not pick up from the 2008 crisis (which most countries have not yet recovered completely (US, Japan and countries in Europe), China can still mobilize resources internally and achieve 6% growth, continuing to be a major driver of economic growth in the world.

Closing his talk, Prof. Lin sounded very optimistic, mentioning that China serves as an inspiration for other developing countries. The experience of China demonstrates that once you have the right policy and ideals, a country can be changed. The country will have to continue deepening its reform, and though it has huge potential for growth, the external situation will be very challenging. The country will also have to show more responsibility for the world (i.e. developing international aid programs). Its growing economic significance implicates greater political significance as well.

Author’s note: My observation is that Prof. Lin failed to address the issues of environmental and health impact that the economic growth brought to its country. He was very enthusiastic about presenting China as this growing economic and political force at global scale, but his analysis – at the event – lacked some of the emerging reflections over the importance of performance indicators other than capital in a country’s development initiatives. This stagnant mindset seems to be leading to the same problems of traditional development policies, which can be only be accentuated by China’s worrying demographics.

[Podcast] The historical context of Corporate Diplomacy as an emerging practice

In this first podcast, I will be speaking about the historical context of Corporate Diplomacy as an emerging practice. This historical context is important because it will tell us how Corporate Diplomacy came to emerge as a practice in private organizations.

I am going to give you a few dates within a time frame so that you can be situated historically, which were taken from the United Nations` website. So, in 1865 and 1874 is when we saw the first international organizations to take form. But up until the Cold War approximately, we say in International Relations that we were living in an era of Realism, because we had a “realistic” international system: Nation States were the ony actors – the most powerful actors – who were able to negotiate their individual interests within the international system.

So, if that is pretty much how it was until the Cold War, so why is it exactly that I want to speak about international organizations? Because with the emergence of international organizations this scenario starts to shift a little. So, very lightly, in the beginning – 1865 and 1874 – with the first international organizations, which were the International Telecommunications Union and then the Universal Postal Union, we see these international movements where individual members started to get together to negotiate over particular subjects. Then we had the Treaty of Versailles in 1919 that became the League of Nations trying to establish peace right after the I World War (they weren’t very successful because we had the II World War, so they interrupted their activities). Within the Treaty of Versailles the International Labour Organization also took form. Then we had the II World War, and after we were done with that mess, in 1945 the institution United Nations was officially formed. And then in 1948, the GATT – the General Agreement on Tarifs and Trade – which later became the World Trade Organization – the WTO to establish some sort of negotiation in the international trading system.

TheseĀ  international organizations started coming into the international scene and becoming more relevant, so they had more relevance in the negotiations – not only Nation States now had to negotiate these multilateral agreements and negotiations, but we also had the international organizations interested in the public good, of course.

But when we reache the 1980s and 1990s, we start seeing these internationalizations movements – the internationalization processes of corporations. You know, majorly American, European and Japanese private organizations that started to establish offices and branches overseas in other territories, and they became these networked private international organizations. These transnational organizations – transnational corporations – they started growing to the extent where some of them can actually be more powerful than some of the Nations States nowadays, and this is where we say that they became powerful enough where they have a lot of influence and a lot of power to come into the negotiation table in the international system. And this is where I say that we see the birth of Corporate Diplomacy, because these institutions are very powerful.

So, just to recap, we had the Nation States, they were the main actors, the most powerful actors, they would do all the negotiations. Then we started seeing the emergence of international organizations into the system and that is the beginning of the diffusion of power in the negotiations, and then more towards the 80s and 90s we see these private organizations – these transnational corporations – also taking form and becoming more powerful and starting to influence decision-making within the public environment.

To add a little more of a theoretical perspective, within International Relations we have a few authors who really theorize this movement and explain what is going on with these dynamics. Robert Keohane and Joseph Nye have partnered in a couple of publications, but I mostly like this publication by Joseph Nye called The Future of Power, and also Susan Strange in her publication called The Retreat of the State: The Diffusion of Power in the World Economy. They both talk about how technology is not put at the center of this transformation, but gains a very significant aspect on why this transition happens. So, information and communication technologies were very influential in the transition of power and the diffusion of power. These two authors, Joseph Nye and Susan Strange in these two books, will explain this in a very concise and a very clear way.

So, with these private organizations having more significance and having more space to negotiate and promote their individual private interests, you have the employees who go out and relate to governments and other institutions and then negotiate their interest. But the thing is that we need to create the mindset in these professionals that they are actual diplomats from these organizations because of how powerful these private institutions are becoming, so they need to be trained as corporate diplomats. It`s a little complex to train these profesisonals, but they have to become more aware of their political influence in the external environment – outside of the organizations of course.

So this was the first podcast, and in the next podcast I will talk about the structure of the corporate diplomacy foreign policy. As much as public diplomacy has its foreign policy as a structured strategy for the State, we need to think of the Corporation as a state, as na institution that has a structured strategy to deal with the external environment.

Stick around, there is a lot more to come!