Political and Economic Risk for Brazil - Essay Example

Kelly Tomaska Brazil Economic Risk 26 February 23, 2006 Political and Economic Risk for Brazil Currently Brazil is being led by President Luiz InácioLula da Silva and while his term may be in jeopardy come election time in October, da Silva sill has many economic and political issues to sort through. According to the Political Risk Yearbook, da Silva is not supported by some groups in the country which could result in potential difficulties for da Silva in trying to achieve positive results regarding poverty and economic reforms (Political Risk Yearbook 4). Structurally Brazil is not positioned well for economic growth and according to the Heritage Foundation’s Index of Economic Freedom, Brazil currently has a negative GDP and is ranked 81st among other countries with a score of 3.08. This score is at an all time low for the country which is positive but is not a model for the country and its economy or politics on a whole (Index, Brazil). In regards to economic changes they are considered extremely risky, as stated in MarketWatch.com “Brazil has been a rollercoaster for investors lately. President Luis Inacio da Silva’s government is embroiled in a corruption scandal, with accusations of accepting bribes in exchange for legislative support” (Kollmeyer 2). Luiz Inácio Lula da Silva was elected to the position of President in 2002. After being elected Lula changed many of his initial plans regarding retirement, tributary and labor. These changes did not go over smoothly with some members of his cabinet and caused further tension. The President believes one the main problems citizens in Brazil face is hunger and has devised a plan to disperse money to underprivileged citizens. Although this act was positive many citizens believed that this was not the most important issue that Lula could have spent money on. One of the most publicized scandals in Brazil occurred when Brazilian Labor Party member Roberto Jefferson admitted he gave bribes to promote the presidential campaign (Wikipedia). According to the BBC news, “based on a survey of 78 firms conducted in 2003, found that just over half had been asked for bribes by officials responsible for tax collection.” The survey also found that more than two-thirds of the firms admitted spending up to 3% of their annual revenues on bribing officialdom, the rest spent more than that. This problem is partially because the Brazilian bureaucracy has always encouraged a flexible guideline to the rules (Plummer). Although the president’s ratings did falter for a bit, they are now up again and he is projected to be able to win the upcoming election. According to the Political Risk Yearbook Lula has taken great steps to enforce social growth but at the same time will be hurt as he tries to maintain policies for foreign investment. PRY also feels that Lula has intentionally stalled some major problems like debt and that will come full circle when elections come around as other candidates will be able to highlight these weaknesses. With stalling these economic issues, it makes foreign traders weary to invest and will cause growth rates to be lower than expected. Although the trade surplus was healthy in the past years the import prices have risen and therefore caused a deflation in the export growth. This will cause a deficit over the year and by 2009 the deficit is expected to reach 3.3 billion dollars (Political Risk Yearbook 4). In addition to the many problems the president will face come election time, there is an inflation problem that is still prevalent in Brazil. In 2003 Brazil had a 13 percent inflation rate which is the fourth highest in South America (Political Risk Yearbook 8). In reaction to Lula’s actions people have reacted and lashed out against their President. When the President promised to settle families on non-productive land and didn’t follow through workers began to “squat” or refuse to leave the land and work to produce goods for their country. Although many of the “squatters” were non- violent they made a stand that affected the nation as a whole (Political Risk Yearbook 14). Another issue that Brazil is currently dealing with is fiscal deficits and their impact on the economy. According to Geographic.org “the root of Brazilian inflation has been the monetization of the public sectors fiscal deficit, because deficits that are not financed by borrowing either from abroad or domestically must be covered by the creation of money” (Geographic). On one side the monetarists push for the idea that money supplies growth in inflation. On the other side are the structuralists who believed that the rise in prices of goods attributed to the lowering of supplies (Geographic). Both sides had pointed and relevant arguments and it is difficult to choose a side when it comes to inflation and the causes, and whether the money supply was the problem or if the rise in price was causing more harm than good. On a positive note, da Silva has lowered taxes for his business owners as he had promised. Taxes on purchases were reduced from 3.5% to 2.0% and were lowered 5% on life insurance policies and financial transactions. In 2004 the President wanted to raise the minimum wage which was positive for the citizens but created a problem for businesses with higher labor costs and with the high rate of unemployment it may not effect the ages as much as originally thought (Political Risk Yearbook 20). Although the President has said he would be tough on crime, the citizens have an impending fear of abductions from very wealthy families. It has gotten to a point where residents in the capital who are wealthy have resorted to flying in helicopters. These abductions are a huge source of income for many groups. Some of the victims of the kidnapping feel that because of the chaotic economy these types of crimes happen more often (Political Risk Yearbook 22). Obviously the citizens and their feelings towards the President are extremely important and will come into play for the upcoming election. The economic problem in Brazil is certainly not just the fault of the President nor can it be pinned on one specific issue. According to BBC news “(the) tendency in Brazil of employing people in menial jobs that, in more developed countries, do not even exist.” This means that people are employed but their production does nothing to contribute to the economic status of the country. Some of these jobs include taking money for customers to put into machines rather than having them do it themselves. This kind of work is conducive to the higher status citizens who are used to this sort of convenience and it gives others a chance to make money, even though it may not support their nation as a whole (Plummer). It becomes the effort of a country to bring up the economy, not just the actions of the government officials. Richard M. Ebeling had the opportunity to lecture in several Brazilian cities and discovered some very interesting things from the local people. Ebeling works for the The Future of Freedom Foundation and was speaking on the principles of a free society. Ebeling observed that in a year 54,000 new government employees were hired while the staff that was already in place was given significant raises. With the money problems Brazil already had this only created more debt. On tours of some neighboring communities it was observed that some structures were being built but then halted midway because of a lack of funds to complete the projects. The government had seemingly no idea where the money had “disappeared” to which obviously does not promote belief in the government from its citizens. Ebeling also says it is difficult to do any sort of business in Brazil without the use of bribery. Ebeling says that, “the bribes are paid either to have government regulations ignored or to have no "trouble" in obtaining the necessary labor and resources to conduct daily business activities” (Ebeling). Clearly if a lecturer is able to see so many flaws in the government and its control of money there are some very serious internal issues still facing Brazil. Brazil has a very tough road ahead of them and need to make some very serious changes to make their economy more prosperous. Rates of inflation have been controlled since the 80’s but are not stable by any means. People aren’t confident in their dollar compared to the US dollar and they have no reason to believe that their currency will hold any monetary value due to instability in government and their handlings in money. Politically things are unhealthy and people are being bribed to not cause trouble or get things done quicker. While this may work for them it is costing the government a lot of money that they may not even realize is being taken. Brazil needs to take a look at how they can stabilize their economy and be more honest with their government. They need to face the issues at hand rather than pushing them off for a later time. The country as a whole needs to work together to promote a more stable and healthy economy that its citizens believe in and support. Works Cited Ebeling, Richard M. On the Edge of Hyperinflation in Brazil. The Future of Freedom Foundation. March 1990. Retrieved on Feb. 26 2006 from http://www.fff.org/freedom/0390b.asp * Professor Ebeling is the Ludwig von Mises Professor of Economics at Hillsdale College in Michigan and also serves as Academic Vice-President of The Future of Freedom Foundation. Kollmeyer, Barbara. Latin America Turmoil rattles investors. 16 June 2005. MarketWatch. Retrieved on Feb. 25 2006 from http://www.emergingportfolio.com/press/marketwatch_061605.pdf Plummer, Robert. Ruses that spring from Brazils woes. 14 Dec. 2005. BBC news. Retrieved Feb. 25 2006 from http://news.bbc.co.uk/2/hi/business/4468042.stm 2006 Index of Economic Freedom. Brazil. 2006. The Heritage Foundation. Retrieved Feb 25, 2006 from Political Risk Yearbook: Brazil Country Forecast. Political Risk Yearbook 2005, p1, 56p. Retrieved Feb. 25 2006 from http://search.epnet.com/login.aspx?direct=true&db=buh&an=15992070 http://www.heritage.org/research/features/index/country.cfm?id=Brazil Politics of Brazil. Wikipedia Encyclopedia. Retrieved Feb. 26 2006 from http://en.wikipedia.org/wiki/Politics_of_Brazil. Brazil Fiscal Deficits and Inflation. Data as of April 1997. The Library of Congress Country Studies. Retrieved on Feb. 26 2006 from http://www.photius.com/countries/brazil/economy/brazil_economy_fiscal_deficits_and_~6951.html Read More