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

[Podcast] Christine Lagarde’s call for action – IMF World Economic Outlook

In today’s podcast we are going to be speaking about the IMF World Economic Outlook, which is a publication that was release by the International Monetary Fund in October of 2018. I actually want to focus this conversation a little more on the press conference that was delivered in the World Economic Forum on January 21st of 2019, where a panel was held with directors of the IMF – the Managing Director Christine Lagarde, she is very well known, but she also had the support of an economic counselor, who is the director of their research department, in order to deliver the sort of information that we are going to review today. What I think was very interesting – the highlight of this study, of course – will be Lagarde’s message because she introduced us to the study. She gave us an overview of what is actually happening in the global economy. But she had a very strong call for action and, of course, when that comes from Christine Lagarde I think that we need to focus and pay attention. She is a powerful woman, she is running the IMF, and it was very interesting to see her out there and deliver this message.

In the beginning she tried to make this analogy between cross-country skiing with the global economy. It was quite interesting, it was kind of cute to see her – such a powerful woman – come down and say: “here,” – in a very educational manner – “this is what we expect from the economic environment. We want predictability, less risk. We want things to run smoothly, just kind of like cross-country skiing”, which is a personal practice. So that was quite interesting.

But Lagarde did not have a very exciting message to tell us. She actually had some unfortunate news for the global economic environment. She told us, here, we have to deliver this message that we are downgrading the growth forecast since october 2018, because risks are on the rise and we have some bad news on the trading front, so we have some threats in the trading environment which is sort of escalating all sorts of problems and risks in the global economy and for that reason they had to announce a further downward revision of the forecast that was published in October. This is pretty much because of the significantly higher risks.

Higher trade tariffs and rising uncertainty over future trade policies. That is a big issue that is one of the key sources of global economic risks. Lower asset prices, higher market volatility, which these three combined are tightening financing conditions and that is including for advanced economies. And this is in a scenario of high debt burden in both private and public sectors are carrying a high debt load right now.

But she does give us the message that we are not facing a global recession right around the corner. This does not mean that a major downturn is happening. But what is happening is that a sharper decline in global economic growth is happening, there are many issues, including geopolitical worries as well.

But she says that this scenario actually shows us a very clear message for policy-makers. One is that they need to address remaining vulnerabilities. And two, is that they need to be ready if a serious slow down were actually to materialize. So, if a recession is actually to materialize, policy-makers need to be ready. Third message is that policy-makers need to harness existing growth momentum, and she is very emphatic. She says, yes, there is growth momentum, so we need to take advantage of that and harness these sorts of opportunities.

Policy-makers also need to work on reducing high government debt, and she is making a point here that this opens space to fight future downturn in the global economy. So, economies need to be ready if that comes to take place.

As far as monetary policy, they should be data dependent and exchange rates should be allowed as shock absorbers, and I thought that that was kind of interesting because of the whole conversation behind exchange rate manipulation. Next message is about economic reforms. They need to be in place in order to push growth, specially in labour markets and infrastructure investments.

So, these were the messages that she believes that this risky scenario is showing us. But she also makes a point in saying that if we must deliver the promise of the digital revolution, it has to be inclusive to all people, including measures to help workers that are displaced because of the automation of work, and we also need to create opportunities for women and young people.

She has a very important point here on International Cooperation. She said that for efficient and effective collaboration in the international system we have to increase our efforts in resolving the shared problems and that meaning, we need to fix the global trading system. There is a call for action here for the G-20 saying that they have to deliver results. This is a call for the World Trade Organization reform. I think this took place in Buenos Aires. She says that we need to collaborate in fighting corruption and tax evasion, and also, collectively address climate change.

Now, one very interesting message, I think she nailed in closing her speech talking about something that she calls New Multilateralism. And that was brilliant, because she runs away from the term globalization. Because people have been feeling very uncomfortable about the globalization topic, and globalization issues. Countries are becoming more nationalist driven, and she puts this here that is not becoming a unit, it is staying multilateral but acting together. And I thought that that was quite brilliant. She gives us a new perspective on globalization. Kind of running away from the term, but still sticking to togetherness. Kind of nice. And that includes macroeconomic policies and structural reforms that need to be applied to many economies in the world.

Now, going back to the report. In October of 2018, the IMF had this projection of global growth at 3.7% in 2019 and they reduced that to 3.5% in 2019 and then they also reduced to 3.6% in 2020. Now this is for global growth. The growth in advanced economies is forecasted at 2% in 2019 and 1.7% in 2020. And then emerging markets and developing economies at 4.5% in 2019 and 4.9% in 2020.

Both in the report and the press conference, they really put emphasis on the rising trading tensions and then the policy uncertainty that raise concerns about the global economic prospects, because these factors could actually lead firms to postpone or forgo capital spending, and then hence slow down economic growth and investment and demand.

One very interesting point in the report – and this is where I am going to close this podcast with – is the point that the IMF is now keeping an eye on increasing market power. They also think that this is a risk for economic growth. They said that the concerns about corporate market power is growing pretty much for two reasons. One is because, in the past decades, there has been some macroeconomic trends that can be somewhat the fault of corporate behaviour. Low investments, despite of rising corporate profits, declining business dynamism, low productivity growth and falling labour income. This is quite interesting because they pretty much raise a flag here saying, here, we have to review the behaviour that is happening in the private environment, we have to follow up on actions that are going to change this sort of trending behaviour. And, I mean, if we are talking about Corporate Diplomacy, there is a lot to be talked about on here – activities and strategies that need to be built in order to respond to such a claim that corporate market power can actually account for these macroeconomic trends that are not so positive for the overall economy.

And then the second reason about the rising concern in the market power of corporations is that the rise of tech giants has raised questions about whether this trend – of the tech giants becoming more powerful – and if this trend continues, the IMF is saying that we need to rethink the policy that is needed in order to maintain fair and strong competition. I thought that it was very nice to put in the context of Corporate Diplomacy. So, there is a lot that could be explored in this report. This increasing market power session in this report itself is evidence that government is becoming aware and it actually wants to tackle the sort of increase in power for private environment. And all sorts of strategies that have to be built, not because the private environment needs to win in the game. We actually want a balanced governance strategy nowadays.

[Podcast] Creating the Corporate Foreign Policy

The topic today is Corporate Foreign Policy, but how did we come up with this name? Because Corporate Diplomacy is pretty much a reflection of traditional Public Diplomacy, we borrowed the term Foreign Policy. States, in Public Diplomacy, have specific interests that they need to defend in the international environment, so they build up this foreign policy on how they are going to relate to the external economy, to the external political environment. So, we bring ths term – this practice of having a plan on how to relate to the external environment – we bring it to  Corporate Diplomacy and then build this matrix.

I created this methodology to build a strategy that goes beyond the economic interests of the organization. What the Corporate Foreign Policy does is it expands this planning – this strategy building – to engage with the external environment as a whole: the government, the market and society in general. It is a composition of four pilars. So, the methodology is divided in a pilar that is called Information, a pilar that is called Government, a pilar that is called Society and a pilar that is called Market. And this is what I will talk about today. I will break down these four pilars and then talk a little about each one of them and how to build this strategy by starting with the pilar Information.

Information is the main pilar because it is where the organizational philosophy is going to be constructed and how the diffusion of this philosophy is going to be carried on. So, you define the philosophy of the organization and then you also define a strategy to communicate that philosophy within the organization and then to the external environment. This philosophy of the organization is pretty much the organizational’s narrative: what are we portraying externally? What are our ideals, our beliefs upon which the organization is built? Are we a sustainable business? And if so, what do we understand by sustainability? We have to create these concepts in our organizational strategy.

A second step within the information pilar is to define the causes we support. Do we wish to engage in activities that will tackle current challenges such as poverty, climate change and education? If so, we develop these meanings. What are our ideas that compose our strategy to deal with poverty, for example. What do we think that should be done collectively so that issues are minimized and that the problems can be tackled. In the information pilar what we are going to build is a conceptual narrative and this conceptual narrative is pretty much the message that we want to communicate externally. This message needs to be diffused internally so that the people (our employees) who are going to diffuse this information are alligned with the philosophy of the organization.

Now, the second pilar is Government. There isn’t necessarily an order here,  but I like to put information first because you can first construct the philosophy of the organization and then from there on you can build your strategy in the order that you wish: either government, society or market. But within the Government pilar we want to ask ourselves: who in government are we going to engage with and negotiate our interests and interests that are more related to public interests?

Within national governments we have a set of institutions at municipal, state and federal levels. And we have to map these institutions within each one of these spheres. Do we want to relate locally (municipally), do we want to relate at state and federal levels? So, what we are going to do is: we are going to map these key institutions we wish to relate with, we are going to map the programs that interest us, So, if the institution at municipal, state and federal levels have specific programs that they already work with, we need to have these programs mapped out so that we know what kind of proposals we are going to build for technical cooperation. And I think that essentially, we need to have a map for the key contacts within these institutions. A map of people who are within the offices and the people who occupy these offices. And the reason why I think this map is really important is pretty much because organizational employees – especially in private organizations – come and go, they move either to other institutions or they move either vertically or horizontally within the organization. By mapping these contacts out we have a track record, a history of these relations, who is the organization relating to, and at which point within other institutions. And this is a good track record to have because then you don’t have to restart the relationship – to restart the conversation and the exchanges – everytime you have somebody new coming into the offices.

Then we have the institutions at the international levels, and we draw these maps slightly different because we want to know which countries have common technical and commercial interests. If we are based in one country we would also like to know which countries have similar interests and whether there are treaties, either multilateral or bilateral treaties (agreements) already in place to promote these sort of cooperation in these particular interets. Let me give an example. If we are located in Germany and we export to the United States, it would, in a particular segment – lets say, biotechnology – it would be interesting to know which treaties are in place bilaterally, between the United States and Germany, to understand if there is some space to integrate that agreement, that common interest at the higher political level into our activities. This is quite interesting, and this is where real Corporate Diplomacy comes into place, because we have the expertise, we have the economic exchange, we have a lot to be able to cooperate with these bilateral agreements and to put these activities in a more practical perspective and how we can increase the economic exchange – either scientific or economic exchange within these two countries. So this is a good example.

Then there is our third pilar, which is Society. Within this pilar we must define the policy programs that will be carried out by the organization. This is pretty much an extension of the organizational philosophy. Here is where the plan to act on the visions that we have for the collective are carried out. So, if the philosophy says we are a sustainable organization, within the Information pilar we are going to define the concepts of sustainability, and then within the pilar Society we’re going to structure programs to carry out these sort of philosophies. Are we going to promote recycling? Are we going to promote water cleaning? Decrease atmosphere pollution, and so on. We want to know if we have social or environmental policies in place, and if so, what are our priority programs within these policy programs. This is pretty much the third pilar, I’m not going to be speaking about it extensively. We already kind of spoke about it within the Information pilar because the third pilar really depends on the philosophy that the organization has. This has a lot to do with Corporate Responsibility. So, if the organization wants to engage in particular projects that can improve its corporate image, then this is the place where we should create the programs.

Then we move on to the last pilar, which is Market. This is essentially just an integration of the more traditional organizational strategy. Within this pilar we map out the entire supply chain: consumers, distributors, suppliers, competitors. And we kind of have these definitions and these maps – a visual – on how we relate to all these stakeholders.

And here we also define our Research and Development strategy. We establish our priority projects in scientific developments. We map also scientific institutions that might be working on the same type of technologies that our organization is working on, and we also map the incentive programs that are in place for technological developments.

Ideally, all of these pilars must contain action plans for at least a 12-month period. Maybe four years to relate at federal levels, because offices change after four years.  But ideally, every 12 months we should have some sort of revision on our plan, and having an action plan for the next 12-month period. That would be a good time frame to have a vision on how we are relating to the external environment.

So, what this methodology attempts to do is pretty much to centralize – in a good way, centralizing. I’m going to explain this. If you think of air traffic, for example. If you don’t have air traffic control, if you don’t have a centralized vision on what is happening collectively, than you might face accidents and all sorts of problems. So, I think that by centralizing a vision, we can tackle and coordinate the way that we are going to deal with the external issues and problems that may arise in a more efficient way. So I think that in this way, centralization is not so negatively put.

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!