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The buoys from Brazil

Brazil is an attractive emerging market, particularly in the consumer and commodity areas. The consumer market is large and growing while the country has many natural resources, which can be extracted at low prices.

The central bank recently maintained its key interest rate at 19.75 per cent as the economy copes with the increases over the last couple of months. A trade surplus of US$4bn was recorded in June – a monthly record. This brought the surplus to US$19.7bn for the first six months of the year.

Unemployment continues on a downward trend, registering 9.4 per cent in June, down from 10.2 per cent in May.

There is no reason to consider last year’s growth an isolated incident, particularly if raw material prices such as iron ore remain at high levels. This stimulates investment from local and foreign investors, which results in growth.

However, there is a need for reform in many areas directed at instilling confidence among investors. How can confidence be instilled? First, by ensuring that there is law and order. The judicial and police systems must be reformed so as to develop a fair, equitable and uncorrupt court and security system for all citizens. Second, by lowering the role of government in all areas. Privatisation of state enterprises is needed, with the proceeds used to lower tax rates and give preferential rates to those industries which should be encouraged in order to provide employment and leverage the strongest parts of the country’s human and material resources.

These kinds of reforms will result in a shrinking of government debt, which is the prime cause of inflation.

The government is debating the adoption of a nominal deficit goal to improve public results. Some say this could make the market less confident about the real will of the government to spare money to generate primary surplus but, in reality, there should be no deficit for a country like Brazil. To instill confidence, the government should run a total surplus and not a deficit. Brazil’s governments have been chronically dependent on debt, which has led to the rollercoaster economic scenario.

In recent weeks, continuing political turmoil in Brazil has led to the resignation of Jose Genoino, the president of the ruling Workers’ Party, who had been accused of bribing legislators in exchange for their votes. He has been replaced by education minister Tarso Genro.

Latin America has a reput- ation for having more corruption than the rest of the world. There are historical reasons for this, since the colonial systems were basically corr- upt and designed to extract wealth from the colonies without benefit to the local inhabitants. Governments in the colonies such as Brazil were designed not to serve the people but to extract wealth and return it to the home countries in Europe.

Current bureaucrats maintain the attitude that a government post is a means of extracting wealth from the people and not serving the people. For example, when the Brazilian government sold parts of communications company Telebras to local and foreign investors, it invited those investors to extract a fee from the sales of the companies they were purchasing. There was no regard for the minority shareholders.

Ultimately, Brazil has to compete with other countries for foreign investments. Its main rivals include but are not limited to Asian count- ries such as Korea, China, Taiwan and Singapore.

This is because these countries have established government systems and departments designed to welcome foreign investors and make it easy for them to establish their operations. They offer attractive tax incentives for investors and provide a reasonably fair legal framework.

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