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.

These  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!

Recently created government fund for secured infrastructure projects in Brazil

The other day a foreign investor who was looking into potential infrastructure projects in Brazil asked me whether the Brazilian Government makes use of Sovereign Guarantees, Bank Guarantees and/or SBLC’s to attract and secure foreign investors (ment).

At least for infrastructure, I believe the most suitable instrument would be the Brazilian Law 12.712/2012, Art. 32, which establishes the Infrastructure Guarantee Fund (or FGIE, Fundo Garantidor de Infraetsrutura).

This fund is managed by the Brazilian Guarantee Agency (or ABGF, Agência Brasileira Gestora de Fundos Garantidores e Garantias S.A.) and is operated through guidelines which regulate the direct guarantee awards (Regulamento de Operações para Outorga de Garantia Direta Pelo Fundo Garantidor de Infraestrutura), meant to offer risk coverage for noncompliance of pecuniary obligations assumed by the public partner in Public-Private Partnerships.

As of its latest report made publicly available (December 31st, 2017), this fund comprised the value of R$ 568.560.446,00 in total net assets (approx. USD 156.043.574,93 today; not very large due to its recent establishment), and applicable to specific concession operations including the following:

I – Major infrastructure projects included in the Growth Acceleration Program (or PAC, Programa de Aceleração do Crescimento) or strategic programs defined by the Executive Branch;

II – Projects resulting from Public-Private Partnerships in the form of Law 11.079/2004.

However, the exact answer to this question depends heavily on the sort of infrastructure project, value and nature of partnership sought in the country, amongst other specifics.

Accelerating Energy Efficiency: Policy Briefs for the 2018 High Level Political Forum

The High Level Political Forum on Sustainable Development meets annually in July, under the United Nations Economic and Social Council (ECOSOC), where countries present their Voluntary National Reviews (VRNs) of the Sustainable Development Goals (SDGs). The HLPF also carries out thematic reviews of progress on the SDGs including cross-cutting issues. To facilitate an in-depth review of progress, the HLPF annually discusses a particular set of SDGs and their interlinkages. In 2018, the in-depth review will be carried out over SDGs 6, 7, 11, 12 and 15, as well as 17, which is reviewed annually.

As a Major Group Consultative Member for the ECOSOC Civil Society Network, my cooperative efforts are particularly focused on the private-public dialogue over policy briefs contained within the new publication “Accelerating SDG 7 achievement: Policy briefs in support of the first SDG 7 review at the UN High-Level Political Forum 2018”. The document was launched by the SDG7 Technical Advisory Group, in partnership with UN DESA (United Nations Department of Economic and Social Affairs) and includes 27 policy briefs relating to accelerating SDG 7 achievement.

Policy Brief #6 Energy Technology Innovation: Digitalization of Grid Services. Increasing the speed of digitalized technology development could lead to a first-mover advantage for pioneering countries or companies.

  • The need for resilient infrastructure, increasing stress on resources, and decentralized supply) and enabled by the interaction of various disciplines such as data and information networks. As the rate of interlinkages increases and improvements in data and information networks accelerate, we can expect rapid advances in the innovations that exploit the interactions of these technologies.
  • Technology such as sensors, robotics and advanced analytics, which together form advanced interconnected systems capable of quickly analyzing large amounts of data, are developing potentially transformative solutions, across various sectors, for improving energy efficiency and managing more variable renewable energy. This development is driven by continuous improvements, and the cost-performance curve of core digital technology building blocks: computing power, data storage, and bandwidth utilization.

Policy Brief #14 Interlinkages Between Energy and Sustainable Cities: Smart Grid and Smart Buildings. Cities are adopting more energy efficient policies and practices in the transport, buildings, industry, and commercial sectors.

  • The number of energy efficient building codes adopted by countries, and by-law at city levels, has increased in the last five years.
  • Smart grids are enabling major energy efficiency and resilience gains. Using ICTs, the grid is able to manage energy demand and use most efficient energy source on the system.

The formal session to review SDG7 will take place on 10 July from 11:00 to 13:00, during the HLPF 2018 and Side Events sponsored by Member States, UN system and other intergovernmental organizations, Major Groups and other accredited stakeholders will be held in the margins of the event. More information on the HLPF 2018 can be found here.

Brazilian Central Bank publishes Fintech regulations

On April 24th, 2018, the Brazilian National Monetary Council (CMN) approved Resolutions 4.656 and 4.657, which regulate the performance of financial technology companies (known as Fintechs) operating in the credit market.

According to Resolution 4.656/2018, Fintechs may operate within the following two frameworks:

  • Direct Credit Society, or SCD (Sociedade de Crédito Direto), through which Fintechs can lend money raised through investment funds, eliminating the bank as an intermediary; or
  • Person-to-Person Credit Society, or SEP (Sociedade de Empréstimo entre Pessoas), which allows for peer-to-peer lending operations within the established limit of R$15.000 per CPF (individual) or CNPJ (organizations).

In September of 2017, the Brazilian Central Bank had opened a request for comments on the subject (BC Public Consultation 55/2017). The new regulation is part of its + Agenda – the Bank’s strategy to increase competition in the National Financial System, foster credit offer, reducing the cost for the final borrower and increase legal certainty to operations.

 

REFERENCES:

Folha de São Paulo. Fintechs poderão concede crédito sem mediação de banco. May, 2018.

InternetLab. Banco Central regulamenta atuação de startups de tecnologia no mercado de crédito. April, 2018.

Banco Central. BC coloca em consulta pública atuação de Fintechs no mercado de crédito. September, 2017.

2018 Economic Outlook Brazil: Foreign Policy

This is the third chapter of the series of posts on the “2018 Economic Outlook Brazil” that is based on the Presidential Message delivered to the Brazilian National Congress in February, 2018 by President Temer. The official document, in its entirety, advises on the key national policies divided into five central pillars: Economy, Infrastructure, Social, Foreign Affairs and Public Administration.

Read below the policy higyhlights on Foreign Policy. The other posts are Regulated Markets and Structural Reforms.

1. Introduction

In a global scenario trending towards nationalism, Brazil continues to push forward a diplomacy of universalism by promoting multilateral dialogue and integration. Its foreign policy has been implemented towards the interests of economic recovery, job creation, border security and the promotion of welfare.

During the year of 2017, the Brazilian Government continued to give expression to the universalist vocation of its Foreign Policy. Beyond Latin America and the Caribbean, the Brazilian government tried to deepen its diplomatic relations with European countries, North America, Asia Africa and the Middle East. In 2017, Michel Temer visited China (during the BRICS summit), Norway, Portugal and Russia. He also participated in the meetings of G-20 in Hamburg, Mercosur in Mendoza, the UN General Assembly in New York and the WTO Ministerial Conference in Buenos Aires.

Its participation in multilateral institutions is also to be highlighted, having representatives working for the Inter-American Commission on Human Rights, Committee on the Elimination of Racial Discrimination, International Court of Justice and the International Law Commission. Brazil is also in the Presidency of the World Trade Organization.

2. Migration and Refugee Crisis

In 2017, the new Migration Law entered into force, establishing the guidelines for the Brazilian migration policy through which the country has acted in the UN negotiations for a Global Compact on Migrations. The government is also working on improving its mechanisms for granting refuge. Aiming to facilitate the instructions on the process of request for refuge, an electronic ordering system is under development (Sisconare), which will give greater speed, reliability and security to the processes. A working group was also established for the revision of the resolutions of the National Refugee Council (Conare).

3. China

In 2017, China remained Brazil’s main trading partner, and an important source of investment. During the Presidential visit to China, bilateral agreements were signed in the areas of tourism, health and consumer product supervision. The bilateral cooperation also advanced through the launch of the Fund for Brazil-China Cooperation for the Expansion of Productive Capacity.

4. Africa

The African continent is a permanent priority to the Brazilian Foreign Policy. During the UN Assembly, in September, President Temer met with the President of Egypt, Mr. Abdel Fattah Al-Sissi, to discuss economic opportunities for both countries. In the same month, the Mercosur-Egypt free trade agreement entered into force. Egypt is the main destination of Brazilian exports to Africa.

In 2017, the Brazilian Foreign Minister visited Namibia, Botswana, Malawi, Mozambique, south Africa, Sao Tome and Principe, Ghana, Nigeria, Côte d’Ivoire and Benin. During these visitations, cooperation agreements were signed in areas such as visa facilitation, social security, and air transportation, reiterating the country’s commitment to socio-economic development and the consolidation of peace and democracy in West Africa.

5. BRICS

Within BRICS, progress was made towards the consolidation of the New Development Bank (NDB) with the approval of the 2017 – 2021 General strategy, which included the bank’s second batch of loans and the opening of its first regional office in South Africa. In its 2017 summit, BRICS signed the Plan of Action for Economic and Trade cooperation and the Customs Cooperation Strategy.

6. Middle East

Brazilian Diplomacy is also attentive to the geopolitical situation of the Middle East. It defends the two-State solution to the Israel and Palestine conflicts, based on International Law and opposing to the illegal construction of Israeli settlements in Palestine. President Temer met separately, in New York, with the Israeli Prime Minister and the President of Palestine.

In May 2017, the Brazilian Minister of Agriculture, Livestock and Supply visited Saudi Arabia, Qatar, the United Arab Emirates and Kwait, helping to maintain the Brazilian beef exports. To attract investments, the Brazilian government went on a mission to Saudi Arabia, Bahrein, Kwait and Qatar.

7. Regional Integration

In 2017, Brazil prioritized advances in economic-trade relations and in the areas of border cooperation, physical integration and the fight against transnational crimes within the Latin America and Caribbean region. In commitment to the Ushuaia Protocol, members of Mercosur voted on the indefinite suspension of Venezuela from participation in the bloc. In articulation with other 11 countries in the “Lima Group”, Brazil seeks to favor the return of democracy in Venezuela. Internally, an inter-ministerial group was designed to coordinate the reception of the Venezuelan migratory flow in the Northern region of Brazil. A Resolution of the National Immigration Council made it possible to grant temporary residence to Venezuelan nationals for two years.

In April, the Protocol of Cooperation and Facilitation of Investments of Mercosur was signed, and in December, the block agreed on the Protocol for Public Procurement. A free trade agreement started to be negotiated with the European Free Trade Association (EFTA), formed by Switzerland, Norway, Ireland and Liechtenstein. The negotiations for an FTA with the European Union are still under negotiations.

Brazil has also maintained an active participation in the Amazon Cooperation Treaty Organization (ACTO), especially in the illegal deforestation monitoring program, in the projects for water resources management and forest firefighting in the Amazon basin.

8. Foreign Trade

The results of the Brazilian foreign trade have contributed to the return to growth, as the country recorded a surplus of USD 67 billion in 2017. Both exports and imports recovered some of the dynamism lost during the crisis. In May, Brazil requested access to the Organization for Economic Co-operation and Development (OCDE) and, in attempt to speed operational processes, began the implementation of the Digital Origin Certificates and the Consolidated Portal for Trade.

It is estimated the start of production and exporting by companies located at the ZPE in Ceará (Export Processing Zone) has contributed to leverage the state economy. Other ZPEs are already in advanced stages of implementation in the states of Piauí and Mato Grosso.

 

Source: Presidential Message to Congress 2018 (adapted translation)

Brazilian government reduces import tariffs on ICT and capital goods

The Brazilian Foreign Trade Chamber (CAMEX) issued Resolutions No. 14 and 15/2018, reducing to zero percent the import tax on capital goods (780 items) and computer and telecommunications goods (50 items). The tariff reductions that entered into force on February 28th under the Brazilian Ex-tarifário regime are temporary and will be in place until December 31st, 2019 as established by the new resolutions.

The Brazilian Ex-tarifário regime consists of the temporary reduction of the tax on imports of goods when there is no equivalent national production. The special customs regime is intended to promote a reduction in the cost of investments and to produce a multiplier effect on employment and income on differentiated segments of the national economy. Camex Resolution No. 66/2014 established the rules for the concession of the Ex-tarifário regime.

2018 Economic Outlook Brazil: Regulated Markets

This is the second chapter of the series of posts on the “2018 Economic Outlook Brazil” that is based on the Presidential Message delivered to the Brazilian National Congress in February, 2018 by President Temer. The official document, in its entirety, advises on the key national policies divided into five central pillars: Economy, Infrastructure, Social, Foreign Affairs and Public Administration.

Read below the policy higyhlights on Regulated Markets. The other posts are Structural Reforms and Foreign Policy.

1. Oil & Gas

Law No. 13.586 of December 28, 2017 was part of a broad set of measures that altered the regulatory framework for the oil sector. The act aimed to increase competition in the exploitation of reserves and thereby increase the income absorbed by taxpayers in the form of tributes, royalties, special participations, signature bonuses or oil surplus.

Decree No. 9.128 of 2017 extended the benefits of Repetro until 2040. This is a special customs regime for importing and exporting goods for research and drilling activities of oil and natural gas. This regime has been in place since 1999 and aims to equate the taxation of the oil sector in Brazil with the practices of other producing countries.

Resolution No. 17/2017 from the National Council for Energy Policy (CNPE) established the Petroleum and Natural Gas Exploitation and Production Policy, which defines the guidelines for policy implementation for the planning and realization of public bids. Resolution 10/2017 from CNPE establishes the schedule for the bidding rounds of blocks and fields for oil & gas exploitation and production for the biennium 2018-2019.

There was a change in the clause of Research, Development and Innovation of the Programme for the Competitiveness of the Productive Chain, Development and Improvement of Suppliers of the Petroleum and Natural Gas Sector (Pedefor, Decree No. 8.637 of 2016): A percentage of 30% to 40% of eligible expenditure in PD&I should be destined to universities or research centers; 30% to 40% for programs, and the remainder to qualified activities defined by the concession itself.

2. Mining

Throughout 2017, the Brazilian government reviewed the legislation of the mineral sector, with the objective of restoring the credibility and legal certainty demanded by the investors. Provisional Measure No. 789 (converted into Law No. 13.540/2017) provides for the Financial Compensation for the Exploration of Mineral Resources (CFEM); Provisional Measure No. 790, amends the Mining Code (Decree-Law no. 227/1967); and Provisional Measure No. 791 (converted into Law 13.575/2017) creates the National Mining Agency (ANM) for the regulation of the mineral sector, substituting the former National Department of Mineral Production (DNPM).

3. Electricity

The Brazilian government issued new legislation in 2017 to support and encourage the process of privatization. This is the case of Decree No. 9.192/2017, which regulates the bidding process and the respective transfer of share control of electricity distribution companies controlled by Eletrobras. Provisional Measure No. 814/201 gives incentives for the transfer of share control and includes Eletrobras in the National Program for Privatization.

4. Basic Sanitation

Population in Brazil still faces serious problems related to access to basic sanitation services, despite advances promoted by the last legislation revision enacted by Law 11.445/2007. There are deficiencies mainly in the water supply and treatment and sewage collection and treatment services.

There is a general understanding that it is necessary to increase legal certainty aiming at investment expansion. As per current regulatory framework, the country has more than 50 regulating agencies in the sector, with municipal, regional and statewide outreach. This multiplicity of actors contributes to the context of low investments due to the intertwined complexity of rules. The government is considering changes in Law 9.984/2000 in order to assign to the National Water Agency (ANA) new competences for the coordination of services in basic sanitation.

5. Telecommunications

The General Telecommunications Law No. 9.472/1997 was published two decades ago and, given the rapid technological innovations in the sector, a regulatory reform is urgently necessary, since the concession of fixed telephony becomes less attractive in relation to emerging broadband technologies. The Draft Bill PLC 79/2016 that is under discussion in the Federal Senate is proposing legislation reform in order to reverse the obligation of investment in fixed telephony in favor to investments in broadband expansion.

 

Source: Presidential Message to Congress 2018 (adapted translation)

2018 Economic Outlook Brazil: Structural Reforms

This is the second chapter of the series of posts on the “2018 Economic Outlook Brazil” that is based on the Presidential Message delivered to the Brazilian National Congress in February, 2018 by President Temer. The official document, in its entirety, advises on the key national policies divided into five central pillars: Economy, Infrastructure, Social, Foreign Affairs and Public Administration.

Read below the policy higyhlights on Structural Reforms. The other posts are Regulated Markets and Foreign Policy.

1. Economic Outlook

The year 2017 presented the end of the longest economic recession ever recorded in the Brazilian history. The Gross Domestic Product (GDP) is increasing, inflation has slowed and unemployment and interest rates dropped. The year ended with an inflation rate of 2.95% p.y. (Extended National Consumer Price Index, or IPCA for Portuguese) and with the basic interest rate of 7% p.y. (Selic – Sistema Especial de Liquidação e de Custódia), the lowest since 2002.

Desempenho PIB 2017

2. Cash Withdraws From Severance Funds

Cash withdraw measures adopted in 2017, from public funds, contributed to the reduction of household debt and the expansion of consumption. The Federal Government facilitated access to the FGTS accounts (Guarantee Fund for Length of Service) of 26 million beneficiaries, which injected R$ 44 billion in the economy, along with the anticipation of R$ 2,2 billion in withdraws from 1,6 million retiring beneficiaries of the PIS/Pasep accounts (Social Integration Program and Heritage Formation Program for Public Servers).

3. Fiscal Reform

The Constitutional Amendment No. 95 of December 15, 2016 was responsible for creating the new Fiscal Regime, which limited public spending growth, modified the fiscal policy and, along with other proposals related to public accounts, reduced the uncertainties regarding fiscal policy conduct in the country.

4. Regime for the Fiscal Recovery of States

The Complementary Law No. 159 of May 19, 2017 established the Fiscal Recovery Regime (Regime de Recuperação Fiscal – RRF), seeking to enable the recovery and solvency of states suffering from serious financial crises. In general terms, when adopting the RRF, both State and Union recognize the financial imbalance of the State and specify the adjustment measures, with respective impacts and deadlines, as well as the sources of funding that will be used in the period of the recovery plan.

5. Modernization of Labor Laws

The labor market also presented significant changes and signs of mild recovery. The modernization of the labor laws, a reform approved in July 2017, resulted in the Law No. 13.467/2017, which updated the Consolidated Labor Laws (CLT) framework. The new structure reduces uncertainties and allows greater autonomy for workers and employers to enter into agreements. With the newly adopted legal framework, the government expects to reduce informality in employment and increase job posts and wages.

6. Social Security Reform

In 2017, Social Security registered a record deficit of R$ 268.7 billion. The National Congress is currently debating over its Social Security Reform as an essential component of the reform package for economic recovery, aimed at balancing the public social pension accounts.

The demographic dynamics of the country is imposing significant challenges on policy-making, and in the case of social security, the impacts are direct. Brazil is experiencing an increase in life expectancy, and consequently, in the amount and duration of payments of the security benefits. Added to this is the decrease of reproduction rates, which alters the proportion of active individuals in the job market. This is a relevant fact because the Brazilian social security system is based on simple allocation, being that active workers pay the benefits for those who have withdrawn from the labor market. In 1980, there were 13 adults for each elderly person. Today, there are nine adults for each elderly person. The demographic bonus for federal and state public servers is in an even more critical condition: 1,2 and 1,4 active worker for each beneficiary, respectively.

7. Long Term Rate for Public Financing

The new Long Term Rate (Taxa de Longo Prazo – TLP), established by Law No. 13.483 of September 21, 2017 replaced its former equivalent, as the basis for compensation on the main sources of long-term financing in Brazil. The new TLP will remunerate these financings when applied by the official credit operators contracted from January 2018 onwards. The new rate is composed by the variation of the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – IPCA) and by a monthly prefixed interest rate that is based on the earnings of the National Treasury Notes – Series (NTN-B) for a five-year period. This term reflects the average time for the BNDES (National Bank for Economic and Social Development) loans that use such rate as a basis for compensation.

Source: Presidential Message to Congress 2018 (adapted translation)

GDP growth projected at 2,2% for 2018 in Brazil, reports Central Bank

The Economic Policy Division for the Brazilian’s Central Bank has released its quarterly inflation report[i], projecting a 2,2% GDP growth for 2018. This is certainly good news, specially coming from a two-year recession and 0,7% in 2017.

The executive summary states that the set of reported indicators of economic activity is consistent with a gradual recovery of economic activity. GDP grew for the second consecutive quarter in the second quarter of 2017, which, together with high-frequency sectoral indicators, led to upward revisions in the projections for this year’s GDP growth. Also, highlighting the positive performance of the services sector, which benefited from continued recovery in retail sales, and significant expansion of household consumption, after nine quartterly drops (there is evidence that the withdraws from FGTS accounts – worker’s social security deposits – contributed to the increase in consumption).

Unempolyment rate has also receded in the quarter ending in July, with net creation of 80 thousand formal Jobs, in comparison with net destruction of 258,4 thousand Jobs in the same period of 2016. Furthermore, the evolution of the country’s external transactions remained favorable in the quarter ending in July, when the current account posted a historically low deficit, especially due to the trade surplus recorded in the period.

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[i] An executive summary version of the Inflation Report – September/2017 is available in English, at the official Central Bank’s page.