Americas Average = 62.3 World Average = 60.6 1995 2007 100 80 60 40 20 0 QUICK FACTS 115 How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index. BRAZIL Population: 183.9 million GDP (PPP): $1.5 trillion 4.9% growth in 2004 2.6% 5-yr. comp. ann. growth $8,195 per capita Unemployment: 11.5% Inflation (CPI): 6.6% FDI (net inflow): $8.7 billion Official Development Assistance: Multilateral: $173 million Bilateral: $366 million (6% from the U.S.) External Debt: $222.0 billion Exports: $109.1 billion Primarily transport equipment, iron ore, soybeans, footwear, coffee, automobiles Imports: $80.1 billion Primarily machinery, electrical and transport equipment, chemical produccts oil Brazil’s economy is 60.9 percent free, according to our 2007 assessment, which makes it the world’s 70th freest economy. Its overall score is 0.8 percentage point lower than last year, partially reflecting new methodologgica detail. Brazil is ranked 17th out of 29 countries in the Americas, and its overall score is slightly below the regional average. Brazil is a regional economic power and receives high scores in fiscal freedom and freedom from government. It has moderate tax rates, both personal and corporate, and overall tax revenue is not high as a percentage of GDP relative to neighboring countries. Brazil suffers from a highly inefficient and corrupt bureaucraacy which contributes to low scores in business freedom, investment freedom, financial freedom, and freedom from corruption. Because of serious regulatory inflexibility, starting a business takes more than three times the world average. Significant restrictions on foreign capital exist in a wide variety of sectors, and the government remains heavily involved in the banking and financial sectors. The judicial system is inefficient and subject to corruption, as are other areas of the public sector. BACKGROUND: This vast democratic nation possesses abundant natural resources but is known for its high and persistent income inequality. Brazil suffers from serious obstacles to long-term investment and economic growth, including a convoluted tax system, barriers to foreign investment in some sectors, government management of most of the oil and electricity sectors and a significant part of the banking system, a weak judiciary, and a complicaate regulatory system. Agriculture and industry account for 10 percent and 40 percent, respectively, of Brazil’s gross domestic product. The economy is 60.9% free Rank: 70 Regional Rank: 17 of 29 @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@BUSINESS FREEDOM — 53.3% Starting a business takes an average of 152 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is difficult, and closing a business is very difficult. The process for opening a business requires about 100 differren documents. The overall freedom to start, operate, and close a business is limited by the national regulatory environment. TRADE FREEDOM — 64.8% The weighted average tariff rate in Brazil was 7.6 percent in 2004. The government continues to liberalize its trade regime, but export support programs, restrictive regulatorr and licensing rules, quotas and import bans, and issues involving the enforcement and protection of intellectual property rights persist. Consequently, an additional 20 perceen is deducted from Brazil’s trade freedom score to account for these non-tariff barriers. FISCAL FREEDOM — 88.6% Brazil has moderate tax rates. The top income tax rate is 27.5 percent, and the top corporate tax rate is 25 percent (a 15 percent tax rate and 10 percentage point surcharge). Other taxes include a financial transactions tax and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 18 percent. FREEDOM FROM GOVERNMENT — 88.8% Total government expenditures, including consumption and transfer payments, are relatively high. In the most recent year, government spending equaled 20.9 percent of GDP, and the government received 3 percent of its total revenues from state-owned enterprises and government ownership of property. MONETARY FREEDOM — 72.6% Inflation averaged a relatively high 7.5 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. Although such public services as railways, telecommunications, and electricity have been privatized, the government overseee prices through regulatory agencies. The National Petroleum Agency fixes the wholesale price of fuel, and the government controls airfare prices. Consequently, an additional 10 percent is deducted from Brazil’s monetary freedom score to adjust for price controls. INVESTMENT FREEDOM — 50% Foreign capital may enter freely and by law receives national treatment. However, setting up new companies is complex. Foreign investment is restricted in nuclear energgy health services, media, rural property, fishing, mail and telegraph, aviation, and aerospace. Foreign ownership of rural land and land adjacent to national borders is prohibiited There are limited restrictions on foreign exchange accounts, and legal restrictions prohibit foreign participatiio in certain economic activities. The central bank must approve outward direct investment in some cases, includiin transfers and remittances, where it has broad administrrativ discretion. FINANCIAL FREEDOM — 40% Brazil’s financial system is South America’s largest and one of the largest among all emerging markets. Despite state involvement, banking and capital markets are diversified, dynamic, and competitive. There are about 200 public and private commercial banks and many non-banking financial institutions. The top 10 domestic banks hold two-thirds of total assets, and the sector is dominated by two publicly controlled banks with half of all assets. The government maintains several specialized financial institutions. The growing insurance market remains dominated by a few large firms. The stock market is not a major source of corporrat finance, but it is growing and trading is active. PROPERTY RIGHTS — 50% Contracts are generally considered secure, but it is importaan to specify the jurisdiction for any disputes. Brazil’s judiciary is inefficient, subject to political and economic influence, and plagued by problems relating to lack of resources and training of officials. Decisions can take years, and decisions of the Supreme Federal Tribunal are not automatically binding on lower courts, causing more appeals than would otherwise occur. FREEDOM FROM CORRUPTION — 37% Corruption is perceived as significant. Brazil ranks 62nd out of 158 countries in Transparency International’s Corrupptio Perceptions Index for 2005. LABOR FREEDOM — 63.8% The labor market operates under relatively flexible employmeen regulations that could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee can be costly. Benefits mandated by the rigid labor legislation amplify the overall labor cost. BRAZIL’S TEN ECONOMIC FREEDOMS Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 100 = most free, = world average 0 50 100 116 2007 Index of Economic Freedom 53.3 64.8 88.6 88.8 72.6 50 40 50 37 63.8 L L L L L L L L L L