Regulatory Reforms Help Fuel Brazil’s Economic Engine

Brazil has developed into the economic giant of Latin America over the last two decades, with a GDP representing close to half of the total output of Latin America. And while this economic development is obviously related to the bountiful natural and human resources the country has been blessed with, it is also clearly connected to a long-term program of regulatory reforms that has gradually opened up various sectors of Brazil’s economy. The current administration has promised to continue with those kinds of changes.

Brazil has had a long history of economic boom and bust cycles and the accompanying disruptive inflationary cycles stretching back to the colonial days. The coffee and sugar industries have long been a mainstay of the Brazilian economy, and when the price of these commodities went up, the economy boomed; when the price went down, it crashed. Businesses in Brazil were also burdened with a high tax rate and a difficult, unwieldy, and corrupt regulatory system. A few reforms of the financial industry and other aspects of the government bureaucracy began in the 80s and early 90s, but the 1994 Plano Real (Real Plan) currency reform was the key initiative.

Watershed Moment

The Plano Real was without a doubt the watershed event in modern Brazilian economic history. The Plano Real pegged the Brazilian real to the US dollar, creating stability in a currency and economy that had been ravaged by inflation and the incumbent economic ills for decades.

The turnaround did not happen overnight, but soon inflation was down to single digits and a period of relative economic stability ensued in Brazil. However, macroeconomic events in the late 1990s (including the defaults of Russia and some Latin American debts) led Brazil to have to work with the IMF to come up with a plan to reduce their growing deficit. As part of the plan, Brazil decoupled the real from the dollar in 1999, but passed a series of financial and other structural reforms to reassure investors that Brazil would continue their conservative fiscal and monetary policy despite maintaining a floating currency.

Having a quasi-floating currency over which its central bank could exert some control allowed Brazil to gradually inflate the value of the real, which helped ameliorate inflationary pressures and allow the influx of relatively cheap consumer goods during the early 2000s. Brazil continues to use central bank interventions to manage the price of the real in response to macroeconomic events. And quite successfully managed it should be noted, as the Brazilian economy was barely dented by the international financial crisis of 2008-2009. Most economists expected the Brazilian economy to drop by over one percent in 2009 and not much better in 2010, but Brazil blew away their projections with -.6% growth in 2009 and 7.5% growth in 2010.

The Plano Real enabled the establishment of a stable consumer economy, and allowed the government to undertake significant structural and institutional reforms including tax reform, slow but steady deregulation, a conservative fiscal policy, improvements to the regulatory and legal framework and some real steps toward trade liberalization.

Reforms and Increased Prosperity

Brazil continued to reform its political and regulatory structures in a more business friendly manner despite the election of leftist-leaning President Luis Inácio Lula da Silva in 2002.

Lula was very popular in Brazil as he oversaw development programs like “Zero Hunger” and the “Growth Acceleration Plan” that led to the lifting of over 20 million Brazilians out of poverty and the creation of millions of jobs during his two four-year terms.

Despite initial international fears, Lula was also very much a pro-business and development leader. A number of federal-level reform initiatives including telecom regulatory reform, insurance regulatory reform, intellectual property law reform and some small steps toward natural resource industry reform (oil & gas and mining industries) were undertaken during his administration.

Lula passed the torch to his hand-picked successor Dilma Rousseff on Jan. 1, 2011, and she was tasked with moving the country to the international center stage with the 2014 World Cup and the 2016 Olympics both coming to Brazil.

Carrying the Torch

Rousseff has continued Lula’s vision for expanding the Brazilian economy and has pushed forward several further regulatory initiatives, notably in the insurance and petrochemical industries, as well as Plano Brasil Maior, which includes tax breaks and other measures that should help the IT and technology services industry.

Rousseff is also overseeing a second round of the Growth Acceleration Plan, with this version squarely focused on infrastructure for the big upcoming international events in Brazil. Projects include a just-completed more than $30 billion dollar roads and highways improvement project, nearly 50 stadium, road, port, airport and train-related projects scheduled to be complete in time for the 2014 World Cup, and a high-speed train linking Rio de Janeiro and São Paolo to be operational in time for the 2016 Olympics.

Brazil’s development from a cyclical agriculture-dependent country into the sixth largest economy in the world has only taken a couple of decades, and a lot of the credit for this remarkable success has to be given to two generations of thoughtful, forward-thinking political leadership. Their willingness to make tough, sometimes initially unpopular, decisions like the Plano Real, and to carry through with real regulatory and legal reform is what created the willingness of the international community to invest in Brazil, and what has led the world to her doorstep today.