STRATEGIES FOR GROWTH

THE CHANGING ROLE OF THE STATE Photo: Everton Juliano/Christian Parente TABLE OF CONTENTS

BRIEFING ON THE CONFERENCE 6

BRAZIL IN CONTEXT 9

FISCAL AND STRUCTURAL FISCAL 10 POLICY CHALLENGES

MOBILIZING FINANCIAL RESOURCES TO ACCELERATE INNOVATION AND GROWTH 12

REBUILDING PUBLIC TRUST IN GOVERNMENT 14 IN AND AROUND THE WORLD

KEYNOTE LECTURES 15

POLICY BRIEFS

“THE BRAZILIAN PRODUCTIVITY ANEMIA” 18 OTAVIANO CANUTO

“FISCAL DOMINANCE AND INSTITUTIONS IN BRAZIL” 22 ALBERT FISHLOW

“HOW TO TAKE ADVANTAGE OF A GOOD CRISIS: MOVING BEYOND BRAZILIAN CRISIS TO 24 IMPROVE EFICIENCY” MARCIO HOLLAND & DANIELLA DINIZ

“PUBLIC SECTOR CORRUPTION IN REGIONAL PERSPECTIVE” 28 PAUL LAGUNES

“BRAZIL: THE CHALLENGE OF PRODUCTIVITY” 32 JOSÉ ALEXANDRE SCHEINKMAN

INTERVIEW SERIES 35 EVENT SPONSORS & PARTNERS

The Center on Global Economic Governance Columbia Global Centers | was created with the recognition that without promotes and facilitates collaborative and adequate global economic governance there is a impactful engagement between its broad network greater possibility of major crises and a tendency of local partners and Columbia University faculty, toward protectionism and political upheaval. It is students and alumni. Its mission is to improve our mission to develop, promote and implement the understanding of global challenges through new theories, studies and policy initiatives that a transdisciplinary, transcultural and applied cut across nation-state boundaries and address perspective constantly expanding our network. this new reality.

The Escola Brasileira de Administração Pública UM BRASIL is a multimedia platform composed da Fundação Getulio Vargas (EBAPE/FGV) was of interviews, debates and documentaries with established in 1952 in the city of Rio de Janeiro as leaders in academia, business, and politics. the first public administration school in Brazil and These materials address critical issues within the Latin America. EBAPE emerged as a partnership economic, political and social framework of Brazil. between FGV and the United Nations (UN) Its goals are: to reinvoke political, economic and to meet demand for qualified professionals social debate in the country;stimulate citizen in the public sector in Brazil. Its mission is to participation and political knowledge; involve create and disseminate management knowledge, young Brazilians in these discussions; assist strengthening the synergy between the public and in developing a critical sense of society; and private sectors, forming professionals capable of promote the questioning and the elaboration of influencing, with conceptual and methodological ideas and actions. rigor, the thinking and practices relevant to the development of Brazil.

4 Photo: Everton Juliano/Christian Parente Photo: 5 BRIEFING ON THE CONFERENCE

STRATEGIES FOR GROWTH: THE CHANGING ROLE OF THE STATE

In the last of three international Monday, Maria Silva Bastos Marques, President conference modules on the topic, public of the Brazilian National Bank for Economic policy specialists gathered in Rio de Janeiro on and Social Development (BNDES) spoke in Rio December 12th and in São Paulo on December de Janeiro, and , President of the 13th to discuss Strategies for Growth: The , delivered the lecture in Changing Role of the State. The two-day São Paulo on Tuesday. conference in Brazil concluded a three-year research initiative led by Columbia University’s Center on Global Economic Governance (CGEG), in conjunction with the Columbia Global Centers in Paris, Beijing, and Rio de Janeiro. The project was developed in response to the global financial crisis of the previous decade and the challenges that Europe, East Asia, and Latin America have faced, both individually and collectively, in its aftermath. The project’s inaugural conference in Paris focused on fragmented North-South economic performance in Europe and sought methods for stimulating sustained, widespread growth. In Beijing, discussion surrounded China’s slowing growth and its eventual transition from an outward, export-oriented economy towards becoming a service economy with strong domestic consumption. In Brazil, participants discussed strategies for economic growth in the context of fiscal and structural reform policy, monetary and banking issues, and institutional legitimacy and transparency. In each of the two morning sessions, selected participants were asked to provide brief introductory remarks to initiate broader roundtable discussion. Following a luncheon and keynote speech, the public discussion panels took place throughout the afternoon and attracted large audiences. Each day of the conference included a keynote lecture with a selected speaker. On

6 Photo: Everton Juliano/Christian Parente Photo: 7 Photo: Maria Eduarda Vaz 8 BRAZIL IN CONTEXT

Not long ago, Brazil was the darling of the • Fostering Growth through Strengthening emerging economies, one of the fastest growing Institutions: Rebuilding Public Trust in and most attractive markets for international Government in Brazil and Around the World investors. At the outset of 2011, then-president ’s approval ratings peaked at Fiscal and Structural Policy Challenges: near 85%, making her one of the world’s most This first morning session covered the ongoing popular political leaders. The economy was debates in Brazil on the traditional roles of growing at a quarterly rate of nearly 5% and the state, including budgeting, taxation, fiscal presalt discoveries were expected to solidify policy institutions, state-owned enterprises Brazil’s position as an economic competitor to and privatization, regulation, productivity and Europe and the United States. achieving fiscal credibility. Today, Brazil faces record high unemployment, seven consecutive quarters Mobilizing Financial Resources to of negative economic growth, and a mere 10 Accelerate Innovation and Growth: percent approval rating for , The second session shifted focus to critical issues Brazil’s new president in the wake of President involving Central Banks and the financial sector Rousseff’s removal from office last August. around the world and in Brazil, specifically. Temer’s administration has indicated it will focus on reducing the country’s massive public Rebuilding Public Trust in Government debt – which hovered around 70 percent of in Brazil and Around the World: GDP towards the end of 2016 – as well as The third morning session sought to address the restoring investor confidence and financial state’s loss of credibility in a time of legislative credibility. At the core of Temer’s proposed inertia, widespread corruption, and general austerity measures is a twenty-year government skepticism towards the government and state spending cap and massive reform of the federal institutions in Brazil. pension system. This represents an acute shift from the center-left policies of the previous administration, which greatly expanded social programs aimed at improving access to housing, education, and healthcare. The conference sought to foster debate and dialogue regarding Brazil’s growth strategy in the midst of political and economic turmoil in Brazil.

Conference organizers identified three focus areas for roundtable discussion on economic growth in the Brazilian context:

• Re-examining the Role of the State in Economic Growth in Brazil: Fiscal and Structural Policy Challenges

• Monetary and Banking Issues: Mobilizing Financial Resources to Accelerate Innovation and Growth 9 FISCAL AND STRUCTURAL POLICY CHALLENGES

The first panel examined the historical universally recognized, there is no consensus on role of the state in Brazil and the ways in which what tax reform entails. As Luiz Villela, former this historical legacy may be responsible for the Trade and Integration Economist at the Inter- present economic and political crisis. Though American Development Bank, pointed out, tax a myriad of policies, institutions, and external reform has been a work in progress since the factors were named as root causes, discussion 1980s and Brazil has yet to see any substantive centered around issues of the size, efficiency, and or effective changes. “It’s not only a question of credibility of the state. burden,” he remarked. “The problem is that the Armando Castelar Pinheiro of the system is complicated and inconsistent,” citing Brazilian Institute of Economics believes that the a series of undertaxed services and overtaxed present state is dysfunctional due to the state’s basic consumption goods. many incompatible national goals. Structural Uncontrolled government involvement policy in the 1930s was built around the theory reaches far beyond these social security and that industrialization requires a strong, central taxation issues. The size and inefficiency of the state. In the 1980s, a new set of goals focused on state were repeatedly highlighted as deeprooted social welfare were added. The state continued failures of the political system that have to favor industry through subsidies and local consequently spread disaster across the nation’s content requirements, while at the same time economy. It is still hard to understand, however, needing to allocate greater resources towards why and how this was allowed to become such a social services. “We need to change the mindset catastrophic issue for Brazil. of Brazilians,” Castelar argued. “The state cannot “Our diagnosis in relation to the situation be all things at the same time.” in Brazil becomes clearer each time we discuss Social security and a perverse and it,” explained Ana Carla Abrão, Secretary complicated tax system were repeatedly of Finance for the State of Goiás. While the identified as two of the greatest drains on system was clearly an unsustainable one, it was government resources. Between its generous a beneficial one that was not easily – or willingly policy, a growing ratio of older dependents to the – disrupted: “Everyone had some tax exemption working-age population, and lenient criteria for or benefit that made society unwilling to admit retirement, total pension expenditures in Brazil that we were going in the wrong direction,” said are among the highest in the world in terms of Abrão. “Now we are reconciling with that truth.” GDP. Last year, the International Monetary For José Alexandre Scheinkman, a Fund projected that this ratio would reach 36 professor of economics at Columbia University, percent by 2050, over three times the already the broader lack of efficiency and productivity burdensome 11 percent the system is responsible is the core issue: “The real problem in Brazil is for today. that our growth has been dismal,” he argued. Participants voiced similar sentiments “And the reason that this happens is because our regarding the nation’s tax system, which was total factor productivity has lagged compared to tabbed as the most time-consuming tax regime advanced economies.” Though he acknowledged in the world in a 2014 study by the World Bank shortcomings of the education system and capital Group, the International Finance Corporation, and accumulation as contributing to Brazil’s meager PricewaterhouseCoopers. Such obstacles hinder growth in recent years, Scheinkman asserted the local business environment and discourage that total factor productivity is what separates expansion and in investment in Brazil. While the the countries that have been able to ‘catch up’ need for reform of the tax system is virtually from those that have not. 10 Otaviano Canuto, Executive Director say, ‘It’s going to be this way or we see disaster,’ at the World Bank Group, suggested the it’s a very undemocratic system.” Citizens are government be forced to control its spending eager to see change and eager to see reform, through swift and resolute fiscal policies. A she argued, but that reform process must involve tightening of government spending regulations them. In reference to the spending cap, she should improve cost-effectiveness of public stated, “Those who will be most affected by [it] spending, in addition to regaining public trust are not represented by the political system,” but in the system. Canuto also called for the state instead “excluded from the process that most to eliminate the many rent-seeking incentives affects them.” that cause the political system to favor poor Andrés Velasco of Columbia University allocation of resources. The view that public asked participants to consider how the political funds are inefficiently allocated is not an and fiscal situations are intertwined: “What are uncommon one; citizen dissatisfaction with the failures of the political system that created quality and cost of public services, particularly the failures of the fiscal system? One has to think mass transport, has been at the core of about political reform as a way of solving the country-wide protests since 2013. fiscal problem.” It would seem that the political While many participants sought aspect of reform has already begun, starting with immediate, large-scale changes, others remained the succession of Michel Temer as president. skeptical regarding drastic measures, such as Temer has identified fiscal responsibility as a President Temer’s plan to freeze public spending. fundamental principle of his administration but Columbia University professor Thomas has yet to disclose details of his planned pension Trebat referred to the spending ceiling as system overhaul. Although the spending cap “shock therapy,” advising Brazil to “focus on alone will not be able to restore fiscal balance, it short-term measures with an immediate impact is hoped that the cap will help lead to a recovery rather than miracle solutions.” Marcio Holland of business confidence and Brazil’s investment of the School of Economics at Fundação Getúlio grade credit rating. Vargas (FGV) shared this sentiment, believing the spending cap to be a reactionary measure that will be ineffective absent any institutional reform. The desire for such reform is felt at all levels of government. In the municipal elections held in October 2016, the leftist Workers Party (PT) lost half its mayors, a shift fueled in large part by anger towards the party. Many see the PT as responsible for the economic fate Brazil has met, as well as for the oil corruption scandal that cost has billions in bribes and lost efficiency. For many, the impeachment of President Rousseff was the first step in expunging widespread corruption from Brazil’s political system. Even so, the quickly shifting political matrix – and the questionable conditions under which President Rousseff was impeached – has left the state with little legitimacy. Daniela Campello, professor at the School of Public and Business Administration (EBAPE) at FGV, warned participants of the fragile state Brazilian citizens now face and the heightened need for democratic processes: “If you 11 MOBILIZING FINANCIAL RESOURCES TO ACCELER ATE INNOVATION AND GROWTH

Brazil exhibits a low level of financial private sector remains extremely inefficient, and intermediation, both in terms of quantity and “invests more in institutional relations with the quality. Moving forward, it will be critical for government than in developing new technology the state to reconsider the role of public banks, and creating new markets.” which presently account for nearly 60% of the Shang-Jin Wei, professor of Chinese total credit market. Their tendency to drive Business and Economy at Columbia University up interest rates weighs heavily on an already drew comparisons between Brazil and China, deficient system and makes investment infeasible. inviting participants to identify their relative Public banks are also heavily subsidized by the strengths and weaknesses from which to federal government, representing a major burden learn. According to Professor Wei, China is on the budget. more effective in facilitating market entry and Privatization and concessions opened up competition than Brazil: “In China, most of the key infrastructure sectors to private investment growth comes, not from making existing firms in the 1990s, but failed to draw the needed bigger, but via dynamic new firms coming in.” He private investment to compensate for reduced does, however, consider Brazil more successful public sector investment. Edmar de Almeida at encouraging innovation and private sector of the Federal University of Rio de Janeiro investment. Despite the fact that private firms in (UFRJ) discussed this issue in his brief, stating China exhibit much higher levels of innovation, “We are losing all of the tools that the state the government in China continues to provide had to promote infrastructure and investment direct subsidies to public enterprises. Professor in Brazil.” In today’s world, the relationship Wei encouraged Brazil to seek productivity between state owned companies and the state and efficiency by encouraging both domestic is no longer legitimate, with companies such as private involvement and facilitating international and Petrobras “just trying to survive.” investment and trade. In this new scenario, the role of the government Brazil remains a very closed economy remains unclear, but the new government will in terms of exports and access to foreign need to find methods for encouraging both markets, a legacy left by its history of ideological private investment and public investment. protectionism. Too many times has Brazil missed Thomas Trebat remains hopeful that new economic opportunities because, as José public-private partnerships will fill in the gap. Scheinkman explained, “We were waiting for This would be particularly critical for investment the [oil drilling] platforms to be produced and in infrastructure, in which Brazil lags behind available in Brazil,” drawing on the technology comparator countries. Part of the solution, it as an example. “Effective protection is different seems, will be driving greater levels of competition from protection.” in the financial sector in Brazil. Rodrigo Reis As Brazil’s domestic markets continue to Soares, professor of Brazilian public policy at stall, the need for robust international trade policy Columbia University, believes it is not enough grows stronger. Debora Revoltella, Director to expand credit, as much of the expansion of the Economics Department at the European and subsidized loans are given to long-existing Investment Bank, recommended developing a companies, rather than creating new companies comprehensive global industrial policy with the and increasing competitiveness. Moreover, the support of other nations, drawing on France’s 12 experience in nuclear energy production. “One side is creating rules,” she said, “and the other side is creating financial incentives for the private sector.” Leonardo Pereira, President of the Securities and Exchange Commission of Brazil (CVM), believes the creation of rules alone will be a significant incentive for private sector investment. Until these are established, though, an insufficient financial system will continue to suffocate investment: “We can have lower interest rates, strong willingness for people to come to the market, but we will be in trouble sooner or later again if we don’t have the basics resolved.” Rectifying the financial sector is fundamental to generating investor interest, trust, and confidence in Brazilian markets. “How can we have a company that generates a billion dollars in revenue per year, but doesn’t have a basic control framework in place?” Pereira stated that a set of “basic ground rules of corporate governance” need to be implemented before Brazil will be considered a credible and attractive market for investment. The new government under President Michel Temer seems eager to restructure Brazil’s insular economy strategy and expand international trade. This is likely to be met with substantial resistance, though, as the country’s ‘local-content’ industrial policies have long favored a set of powerful companies and industries in Brazil. Temer will depend on political support from legislators – as well as his constituents – if he is to make substantial changes to these policies.

13 REBUILDING PUBLIC TRUST IN GOVERNMENT IN BRAZIL AND AROUND THE WORLD

Between the ongoing Petrobras Edmar de Almeida discussed the turmoil investigation, the impeachment of President created within society when politicians are being Rousseff, and calls for the impeachment of her prosecuted. “There is substantial institutional predecessor, the state’s reputation has taken a risk during the cleaning process,” he said. This hit, both within Brazil and around the world. uncertainty also deters investment interest and But it’s not just Brazil, says Paul Lagunes trade relations. Moreover, the true extent of – “Corruption thrives in Latin America,” corruption is unknown, making it difficult to drawing on a recent scandal in Mexico in which know where to start and how to proceed. President Enrique Peña Nieto was revealed to Cristiane Alkmin, commissioner be living in a house built by a favored government of the Administrative Council for Economic contractor. “Brazil’s challenges are disguised as Defense (CADE), called the situation in Brazil education and health issues,” he explained, “but “an economic, political, and ethical crisis,” it really comes down to corruption.” He urged but she believes that many simple fixes would participants to look to Costa Rica and Peru as have collectively have a powerful impact. countries that have reduced corruption using She identified how stronger institutional democratic measures. relationships with ministries and municipalities Lagunes also applauded citizen would mitigate anticompetitiveness schemes, engagement in the nation’s fight against improve the regulatory framework, and redesign corruption: “Brazilians are confronting procurement processes. Ciro Biderman, an corruption in a deliberate manner,” he said, citing economics professor at FGV, also called for the many demonstrations taking place across the redesign of procurement. He discussed the country. “Brazil gets the prosecutorial sides the impact of innovation and the sharing of things right, which is more than can be said economy, citing start-ups like Uber. These for others in the region.” new technologies challenge Brazil’s traditional Eduardo Pontual, professor of regulatory structures. “Uber is a very important economics at UFRJ, argued that more needs disruptive technology in Brazil, but it must be to be done following this process – “You put regulated,” he explained, adding, “However, our people in jail and then what?” Pontual called for system of regulation is not the way to go.” followup to the prosecution system. In addition These and other structural changes to eliminating corrupt politicians, the state must discussed will require a great deal of both try to understand why corruption is able to political consensus and support. Between party thrive and what structural deficiencies feed it. fracturing and charges of fraud pointed at many It is not enough to remove corrupt politicians of Brazil’s most prominent politicians, it will in a system that lends itself to corruption. As be difficult for President Temer to garner the Daniela Campello explained, the problem support needed to rebuild the nation’s political may not specific to people but to the system economy. Much of this support will need to structure: “If the institutions are OK, but come from politicians, but as Ana Carla Abrão people within the institutions are not, maybe pointed out, it starts with the people: “Change we should take a look at the selection process.” is possible when society backs the government Clientelism and patronage politics have – you can’t move forward without the support a long history in Brazil, and combatting them of the people.” will be a long and quite possibly perilous road. 14 KEYNOTE LECTURES

Maria Silvia Bastos Marques Ilan Goldfajn President, Brazilian National Development Bank Governor, Central Bank of Brazil

In her lecture, Maria Silva Bastos Marques Ilan Goldfajn opened his keynote lecture focused on concessions, privatization, and with a diagnosis of Brazil’s economic struggle, the role of the National Development Bank discussing the impact of boom-and-bust cycles in improving infrastructure in Brazil. Despite and the state’s failure to accommodate these the many political and economic obstacles fluctuations. Goldfajn explained that in times facing the country, Bastos applauded Brazil’s of growth, government salaries in Brazil were resilience in trying times: “Few countries increasing beyond what their counterparts in would be able to survive the turmoil Brazil has developing countries would be. As investment experienced over the last few years,” she stated. fell and debt rose in the bust period, the Bastos’s lecture identified the main drivers government failed to adjust expenditures. to growth recovery and how BNDES would “How can [GDP] increase while employment is contribute to national growth. New guidelines falling? It was an unsustainable system,” he said. under BNDES will include expanding access to Goldfajn also discussed how fallen credit, strengthening governance within capital confidence domestically and internationally has markets, improving total factor productivity, and affected and continues to affect the Brazilian unlocking private sector investment. Central economy. In spite of the many reforms needed, to BNDES’s growth strategy is improving the he believes that the new government is willing and nation’s infrastructure; in particular, Bastos able to steer Brazil’s recovery, stating, “There spoke to the need for infrastructural advances in are sufficient resources to repair the system.” relation to the environment, urban mobility, and energy. Bastos encouraged attendees to remain optimistic for 2017, pointing to positive growth expectations and the strides that have already been made towards a controlled level of inflation.

Photo: Maria Eduarda Vaz Photo: Everton Juliano/Christian Parente

15 POLICY BRIEFS Photo: Maria Eduarda Vaz 16 THE BRAZILIAN PRODUCTIVITY ANEMIA

Brazil has been suffering from “anemic Otaviano Canuto is the executive director at the productivity growth”. This is a major challenge Board of the International Monetary Fund (IMF) for because in the long run, sustained productivity Brazil, Cabo Verde, Dominican Republic, Ecuador, increases are necessary to underpin inclusive Guyana, Haiti, Nicaragua, Panama, Suriname, Timor economic growth. Without them, increases in Leste and Trinidad and Tobago. Mr. Canuto has real labor earnings tend to conflict with global previously served as vice president, executive director competitiveness; collecting taxes in order to fund and senior adviser on BRICS economies at the World government expenditures on infrastructure and Bank, as well as vice president at the Inter-American social policies becomes a heavy burden; returns Development Bank. He has also served at the to private investment becomes harder to achieve; Government of Brazil where he was state secretary for and ultimately citizens will have less access to international affairs at the ministry of finance. high-quality goods and services at affordable prices. The focus on urgent fiscal reforms adopted by the new government– public spending cap, age population - leading to labor force growth social security reform (Canuto, 2016) – must be were responsible for 1.1 percentage points to accompanied by action on the productivity front. annual GDP growth in 2002-2010, while increases Brazil’s recent social and economic in labor force participation, especially among progress was achieved without major women - (Agenor and Canuto, 2013) (Canuto, productivity growth. Both minimum and average 2013) - contributed about 0.6 percentage points. wages rose a lot faster than labor productivity, Better access to education accounted for about and employment moved toward sectors with few 0.7 percentage points of average growth in the opportunities for productivity growth. According same period. Since the investments-to-GDP ratio to estimates reported in World Bank (2016a), remained at or below 20%, it is not surprising Brazil’s Total Factor Productivity (TFP) increased that growth in the capital stock contributed at an annual rate of 0.3% from 2002 to 2014 – and only about 0.9 percentage points to growth on only 0.4% p.a. during the roaring years from 2002 average. In labor productivity, which includes the to 2010. Two-thirds of Brazil’s GDP increase can gains from capital deepening as well as TFP, Brazil be accounted for by higher quantity and quality lagged behind most of its peers over the period. of labor being incorporated in the economy. It is now widely accepted that a Only 10% can be attributed to TFP gains. systematic increase in Brazil’s labor productivity Demographic trends – a growing working- and TFP will be needed if the growth-with-

17 social-inclusion that prevailed in the 2000s is especially unfriendly to investments and is to return. But how can Brazil come up technological learning obtained through foreign with these productivity improvements? trade. Transaction costs and difficulties to access One obvious source of productivity technologies, equipment, and supplies from gains is infrastructure. In addition to being abroad limit innovation, productivity increases, a source of gross fixed capital formation, and competitiveness. Investments in logistics sustainable investments in infrastructure infrastructure would help, but an evaluation of the would alleviate bottlenecks that became costs of the complex structure of tariff and non- increasingly tight as the economy expanded: tariff barriers – like local-content requirements - embedded in trade protectionism is also needed. “For at least the past two decades, investment in Brazil has become an unusually closed economy infrastructure in Brazil has been below the rate of as measured by trade penetration and the natural depreciation. The rate of infrastructure opportunity cost of failing to open its economy investment needed simply to offset depreciation has has risen dramatically in the recent past (Canuto, been estimated to be of the order of 3 percent of Fleischhaker, and Schellekens, 2015) (Canuto, GDP (…). In Brazil, total investment in infrastructure 2015). Not by chance, foreign direct investment has been less than 2.5 percent of GDP annually is mostly aimed at accessing Brazil’s large at least since 2000.” (World Bank 2016a, p.74) domestic market, rather than seeking efficiency in production (World Bank, 2016a, p.89-92). As illustrated in the World Bank Access to finance is another aspect of report, substantial negative effects in terms of the Brazilian business environment limiting wasted resources – labor time, misallocation of productivity growth. Finance for long-term projects resources, product loss etc. – are derived from and for small-and-medium enterprises is limited – the insufficient investment in infrastructure and except for a small group of preferred enterprises the bad state of energy supply and connectivity with access to government subsidized credit. (transport, logistics, and ICT). Reducing the In most of its dimensions, Brazil’s business waste of resources through more and better environment not only takes a toll in terms of investments in those areas would result not waste in the use of resources, but also does not only in direct productivity gains, but would also create incentives toward innovative, technology- induce private investment in other sectors. adaptive, productivity-enhancing firm behavior. Additionally, horizontal productivity Lack of competition is part of the problem: gains could be achieved in the private sector by improving Brazil’s business environment. The “Compared to other emerging markets, Brazil has Doing Business Report, prepared annually by a wider dispersion of productivity levels across firms the World Bank for 189 countries, has indicated and a larger number of low-productivity firms. year after year how a typical Brazilian company is (…) Large gains could be made in aggregate TFP obliged to spend human and material resources if physical and human capital were reallocated in on activities that do not generate value because a way that allowed more-productive firms to grow of the difficulties and costs associated with and the least-productive ones to shrink or exit. starting a business, registering a property, High firm dispersion in Brazil suggests market getting credit, paying taxes, and enforcing and policy failures that create an uneven playing contracts (World Bank, 2016b). The negative field for firms, negatively affecting the entry and consequences for productivity are three-fold: expansion of more-efficient firms and the exit of it subtracts productivity at both enterprise and less-efficient ones.” (World Bank, 2016a, p.73-74) macroeconomic levels; it stifles competition as it raises barriers to entry and to the contestability The window of opportunity opened by of markets, especially for smaller firms that are the on-going corruption scandals shall be used unable to dilute the costs of doing business to upgrade governance in the interface between through scales; and it stimulates informality. public and private sectors, with many gains such as: The Brazilian business environment improved rule of law and corporate governance,

18 resulting in lower risk perceptions; improved and moved up substantially only in agriculture. competition and market discipline in key sectors, The bulk of employment growth happened in particularly those bidding for public projects; and relatively low-productivity services, with job cutting out wide-spread kickbacks will reduce creation in manufacturing in turn held primarily to both public overspending and the notorious low-productivity activities. As argued by Agenor, Brazil cost (“Custo Brasil”) born by the private Canuto, and Jelenic (2012) and (2014), overcoming sector (Canuto, George and Fleischhaker, 2016). “middle income traps” is associated with virtuous Besides infrastructure investments and cycles of productivity growth. This includes addressing the business environment, a third changes in the jobs structure which are possible obvious source of systematic productivity only with appropriate infrastructure, access to gains would come from better and more finance, and an enabling business environment. accessible continuing education and skill Brazil has been falling far short in these dimensions. acquisition by workers. Despite improvements Therefore, the Brazilian economy shall in quantity and quality of education over benefit a lot from losing the waste caused by its the last 10 years, there remains the legacy lagging infrastructure and the unhealthy aspects of a long history of educational neglect with of its business environment as components of a respect to large swaths of the population that treatment of its “productivity anemia”. In addition accompanied the non-inclusive nature of Brazil’s to the fiscal regime change currently implemented economic progress over the previous century. by the government – including a constitutionally Even as Brazil achieved upper-middle- mandated public spending cap already approved income status and captured higher positions on by congress and a bill on pension reform - the some global value chains, such as technology- government has also obtained - or is seeking - intensive agriculture, sophisticated deep- congressional approval for other reforms with sea oil drilling, and the aircraft industry, a potential positive effects on investments and substantial share of the population remained productivity. As of the moment this text is mired in poverty. With inadequate education, written: a full agenda of microeconomic reforms poor health conditions, and a lack of on-the- dependent on action by the Executive has been job training preventing many workers from announced; Petrobras has been freed from the increasing their productivity, Brazil’s potential obligation to invest in all pre-salt fields; a review economic growth has been compromised. of local-content policies is being under way; a Provided that the country manages to return reform of the regulatory agencies law is likely to to a comprehensive poverty-reduction path entail an improvement to their governance and which includes improved access to health care, budget independence; prevalence of negotiation financial services, and education Brazil’s overall over labor legislation has been confirmed by productivity could improve in the coming years. the Judiciary; and simplification of two taxes Problems go beyond supply and access with heavy impact on Brazil’s cost of doing to education in general terms. There is an business is expected to be subject to discussion overlap with the problematic Brazilian business in 2017. The government has also launched a environment: Brazil is a country where, first package of new infrastructure concessions. compared to its peers in levels of per-capita There definitely is now a strong perception income, private companies invest less in training among Brazilian stakeholders that, in order to their employees. Disincentives embedded in return its economy to a path of growth-with-social- current tax and labor laws are part of the inclusion, the role of the state in Brazil has to be reasons for this underperformance. In fact, reconfigured so as to support systematic increases current labor regulations discourage longer in Brazil’s labor and total factor productivity. tenures, more hiring, and higher productivity of workers (World Bank, 2016a, p. 107-108). Anemic productivity growth means that over the last 15 years, labor productivity in manufacturing declined, stagnated in services

19 References

Agénor, P. R.; Canuto, O.; Jelenic, M., 2012. Canuto, O; Fleischhaker, C; George, S.; 2016. Avoiding Middle-Income Growth Traps. Brazil at the Crossroads. EconoMonitor [online], Economic Premise [online], November 2012/ 28 April 2016. Available from: http://www. number 98. Available from: http://siteresources. economonitor.com/blog/2016/04/brazil-at-the- worldbank.org/EXTPREMNET/Resources/EP98. crossroads-2/ [Accessed 27 January 2017]. pdf [Accessed 27 January 2017].

Agénor, P. R.; Canuto, O.; Jelenic, M., 2014. Access to Finance, Product Innovation, and Middle- Income Growth Traps. Economic Premise [online], March 2014/number 137. Available from: http:// siteresources.worldbank.org/EXTPREMNET/ Resources/EP137.pdf [Accessed 27 January 2017].

Agénor, P. R.; Canuto, O., 2013. Gender Equality and Economic Growth in Brazil. Economic Premise [online], March 2013/number 109. Available from: http://siteresources.worldbank.org/ EXTPREMNET/Resources/EP109.pdf [Accessed 27 January 2017].

Canuto, O., 2013. Gender Equality Pays Off in Brazil. EconoMonitor [online], 7 March 2013. Available from: http://www.economonitor.com/ blog/2013/03/gender-equality-pays-off-in-brazil/ [Accessed 27 January 2017].

Canuto, O., 2015. Otaviano Canuto, IMF: Trade Opening Could Be a Source of Growth for Brazil. CFI.co [online], 14 October 2015. Available from: http://cfi.co/finance/2015/10/otaviano- canuto-imf-trade-opening-could-be-a-source-of- growth-for-brazil/ [Accessed 27 January 2017].

Canuto, O., 2016. Brazil’s Way Out. Project Syndicate [online], 5 September 2016. Available from: https://www.project-syndicate.org/ commentary/brazil-economic-recovery- temer-government-by-otaviano-canuto-2016- 09?barrier=accessreg [Accessed 27 January 2017].

Canuto, O.; Fleischhaker, C.; Schellekens, P.; 2015. The Cost Of Brazil’s Closed Economy. Financial Times [online], 2015. Available from: https:// www.ft.com/content/d8f0f9fb-73dc-3707-b08b- 285633adebc9 [Accessed 27 January 2017].

20 FISCAL DOMINANCE AND INSTITUTIONS IN BRAZIL

Introduction Albert Fishlow is an economist, a professor emeritus Brazil is again faced with dramatic political of economics at the University of California, Berkeley and and economic problems in upcoming years. Far a professor emeritus of international and public affairs from the rise in confidence that greeted Michel at Columbia University. He is the former director of the Temer when he initially succeeded Dilma, the Columbia Institute of Latin American Studies and Center recent past is rapidly repeating itself. Both for the Study of Brazil at Columbia. He was previously the Ministers and Paul A. Volcker Senior Fellow for International Economics projected more immediate and better economic at the Council of Foreign Relations. results. Alas, turn arounds take longer, especially when the initial difficulties are under estimated. In the next two sections, I will briefly analyze the fiscal and institutional limitations confronting the administrations. By delaying payment for regime. There is a brief conclusion. expenditures, restos a pagar and utilizing a Sovereign Wealth Fund created in the time of Fiscal Dominance high commodity prices, Dilma (and her continuing Fiscal dominance can be defined as a Finance Minister Mantega) managed to maintain context in which monetary policy loses its modest expansion prior to re-election in 2014. capacity to serve virtually alone as a regulator After that, it was a year of attempted fiscal of the domestic economy. A large fiscal deficit restraint by Joaquim Levy that ended with his increases the need for government debt -admitted resignation and a declining economy. Thereafter or not- and ultimately, by relying upon excessive came , with a final attempt to monetary and credit supply to insure domestic modify policies away from the New Economic absorption, increases inflation. In the absence Matrix he had introduced at the beginning of of adequate domestic investment, growth slows Dilma’s government that had seen rising fiscal although consumption remains strong. At some deficits, control of prices, declining real interest point, the economy moves into disequilibrium, rates, and slowing expansion. with need to control prices and offer expanding This explanation of a lack of fiscal incentives to industry, while at the same time control has been accepted as central to policies increasing imports. undertaken by Henrique Meirelles, the current This circumstance prevailed for several Finance Minister. His proposed twenty year years in the both the first and second Dilma constraint on government expenditures, limiting 21 them to the rate of inflation, will take effect next Institutions year. Unfortunately, the details show a rapidly What has been clear is an evolving rising increase in government indebtedness, with strength of civil authority and socio-economic a return to a primary surplus only 5 or 6 years in management within Brazil over the last 30 years. the future. Moreover, since some 90% of federal On the economic side, there is the continuity of outlays are obligatory, that leaves little room for the real, commitment to much lower rates of government investment to drive the economy inflation, greater engagement in world markets, forward by undertaking larger contributions to and rising and positive participation of the badly needed infrastructure expenditure, and financial sector and the Central Bank. On the promoting the creation of combined public- social side, there has been the expansion and private (including foreign) investment projects. better integration of the Bolsa Familia in dealing Government already spends much too much with the bottom income group, a significant rise subsidizing consumption, and too little on in the lower middle class, and even significant productive capital formation. reduction in overall inequality. Even within the That recognition has sparked a second health and education areas, there has been major commitment, alteration of the social advance -not merely in the level of outlays but security system, seeking to eliminate the growing also in their quality. deficit, now amounting to 3.5% of GDP. Such a But above all, and especially most recently, revision characterized both the Cardoso and there has been an active participation of the Lula governments, and was indicated among the Judiciary in this process. This goes beyond the revisions necessary mentioned by Dilma in her ability to expose the corruption in Petrobras and Inaugurals. The reasons are simple: a changing other agencies. It extends to important prior age distribution with overly generous annual decisions in virtually all areas, and most recently adjustments. Here there is expectation of has produced open conflict with the Congress. greater problems in the Congress -who wishes In turn, the Executive Branch has displayed to vote for restrictions to a program popular a reduced ability to play its former dominant among recipients and whose real effect will only role within Brazil, creating greater scope for appear over an extended future time period. The Congressional and Judicial participation. consequence of this measure is substantially for One can note as well greater popular new retirees. Gains in reduced public deficits are participation as a factor of influence, and especially thus delayed. the roles of the press, radio and television, and In sum, the ability to deal with both of the computer in dramatically widening the flow these problems within a short period somehow of information within the country. Lava Jato has require return to high rates of growth of the become a major matter as a consequence. Now past. That was the beauty of the Commodity even the President and the Congress are unable Boom years. Remember as well that petroleum to take actions without an immediate reaction, prices of $150 are unlikely to recur, even with the as was seen in the effort to curtail efforts to current attempt of OPEC to put a higher floor constrain further operations of the Federal on their level. Police and Ministro Publico beyond what already In the absence of such a magical has been accomplished. resolution, the options become more difficult. The real issue is how to assure continuity Making matters worse, these problems recur at and effective integration of these three branches the state and municipal levels. A federalist system of governance into the future. Now, everything involves the necessity of close and productive is short-term; the long term becomes anything cooperation, something that proves most difficult over a month. The present constitutional when resources ae scarce. Then centralization provision for election to the Camara, changes in creates conflict. the role of private finance of political parties, has Can Brazil’s evolving institutions help to always been discussed. But the pressure of the push these challenges to a positive outcome? moment inhibits coherent response. It is hardly an accident that Brazil has evolved into a system

22 of more than 30 political parties: now there is no necessity for anything requiring cooperation and consolidation. That is not the global prominence Brazil has always sought. Evolution within this sphere requires a capability to cooperate rather than compete. It requires all three of the branches to define their authority, and stay within its limits. It is more than writing a set of new rules. These are needed, to be sure. But everyone is now more fully aware of the importance of compliance with them, rather than finding some indirect way to accomplish the desires of a few: whether they be entrepreneurs, labor union leaders, NGO’s, etc.

Final Thoughts There is a new world out there. Globalization was a significant force in defining economic expansion and political cooperation for many years. Now it seems in tatters. The US has Trump; the EU is faltering; Japan has continuously failed to achieve its objectives and is directly challenged by China. How Brazil defines itself over the next few years will have international as well as domestic consequence.

23 HOW TO TAKE ADVANTAGE OF A GOOD CRISIS: MOVING BEYOND BRAZILIAN Marcio Holland is an Associate Professor at Fundação CRISIS TO IMPROVE EFFICIENCY Getúlio Vargas São Paulo School of Economics. He holds a PhD in Economics from the University of California Executive Summary at Berkley. He was previously secretary for economic Just last year Brazilian government policy at the Brazilian Ministry of Finance. spending has reached the astonishing amount of 20% of the country’s gross domestic product (GDP), almost twice as much as two decades ago, with gross government debt going to the astronomical 70.5% of GDP, according to figures of November 2016, from 57.2% of GDP, in December 2014. This increase is a clear indicator of the potential catastrophic scenario Brazil has in the next decade and demonstrate how urgent are the structural reforms. The call for major changes in spending, fiscal, labor, and pension system in the works today demand political legitimacy and a major public consensus to face Brazil’s major challenge: defining its priorities. As our policy recommendation, we defend an agenda of structural reforms with pragmatic and realistic plans and a timeline focused on improving efficiency. There is a huge avenue for increasing in output by adopting measures related to efficiencies and qualities, given the current capital and labor stocks, which we shall present Daniella Diniz holds a PhD in Cultural Studies in the in this paper. Department of Latin American and Iberian Cultures from Columbia University. She’s the Program Manager at Context Columbia Global Centers | Rio de Janeiro and holds two In current times, it is hard to forget the Master degrees: one in Brazilian History (from Universidade words of Raimundo Faoro, Brazilian historian and Federal Fluminense) and one master of sciences in Latin sociologist -who had great influence over Brazilian American cultures from Columbia University. economic and political thought, especially in the 1960ies and on-, and whose quotes echo with 24 the current crisis of our economic and political created a bubble of prosperity that has given the system. According to him, capitalism in Brazil lower and middle classes a false impression that has systematically been implemented as an everything was going well, despite the unreal attachment, some type of appendix of the State, growth of public spending and increasing federal which, in turn, has contaminated itself by its need and state debt. The corruption scandals that to be the perpetrator of all forces, to the point broke right after the ellections in 2014 and led of containing “the germ of economic suicide.”1 to a serious political crisis - culminating with the Faoro’s words become more dramatic removal of Dilma’s presidency - coincided with today as we look at system of privileges and the collapse of this economic model. incentives created by the state that have turned The unrealistic level of responsibility itself into an unmanageable force. Special tax the state has gained has compromised its own regimes to most industrial sectors, regional capacity to sustain itself in the long run, making subsidies, huge banking margins -as we have the government’s future uncertain. More seriously, highest short term interest rate worldwide in a without political legitimacy or capacity, political concentrated banking system-, combined with leaders of today have in their hands the power to an unrealistic federal public higher education and advance structural reforms and set the priorities health system for wealthy families, differentiated for the state or accommodate another set of social security, and so. The Brazilian state is priviledges to the expense of the public good. known for trying to accommodate a variety Should we believe they are capable of doing the of needs, without clearly providing an efficient right thing, this opportunity calls for compromise services to theones who rely on it. and long term views that put the country and the Aditionally, Brazilian State is manifested majority of people at first. itself in many state-owned companies -actually and surprinsingly, we don’t know how many2-; Proposal spread in different economic sectors, from energy Our policy recommendation relies on a to banking - many of them poorly managed and sustainable and long term agenda of structural under political parties influence. Some of them reforms. There is no shortcut not even a miracle have provoked a passionate debate on the role in the path of growth. Brazilian economy and of the State in the economic development, as society have been changing rapidly without the case of the BNDES (Brazilian Development suffering changes in its structure of incentives. We Bank). Others, as the case of Petrobras, was sunk are a potentially rich country with poor structure in scandals of corruption, and also in the abuse of of incentive to save and invest long term. The its main stakeholder. result is a productivity growth stagnated. Ultimately, according to several well- However, there is a huge avenue of known international indicators, such as “doing increasing in output by adopting measures related business”, by The World Bank, and “quality of to efficiencies and qualities, given the current infrastructure”, by The Economic Forum, the capital and labor stocks. entrepreneurial potential of Brazil strives and As a matter of illustration, let’s take a very survives despite all odds. With the insane fiscal simplified and exogneous Solow growth model. structure of multiple tax regimes simultaneously First, we assume that firms produce according operating, companies need to run in over cautious to a Cobb-Douglas production function as the a 1-a measures to adjust the business to the Brazilian following: Yt=AK tN t, where Yt is the output in

“fiscal madhouse.” time t, Kt is the capital stock in time t, and Nt is Finally, the past one and half decade of the labor supply in time t, and A is a constant Labor Party policies have worsened the situation (produtivity). Regardeless issues of lack of in the expense of the good, the bad and the realism, this model attempt to explain long-run ugly intentions of an outdated economic model economic growth through capital accumulation, implemented. The boom of commodities and labor growth and increasing in produtivity. the consumption driven model imbued the state For our purpose here, let’s look inside with the populist sense of omnipotence which the A. As widely known, produtivity (A) can

25 increase alongside education improvements. In quality. Creating an appropriate structure of principle, the residual in this equation, called incentives to save and invest in the long term Solow residual3, can be attributed to differences should result in steady productivity growth in production technology, differences in the scale in an extended period of time. To reverse the of operation, differences in operating efficiency, current scenario, the state needs to position and differences in the operating environment in itself and choose the strategic areas to invest, which production occurs4. taking into consideration the demographic According to Coelli (2005)5, “a natural changes in the past 50 years and looking ahead measure of performance is a productivity ratio: into the needs of its citizen in the future. the ratio of outputs to inputs, where larger As Rahm Emanuel – the famous chief values of this ratio is associated with better of staff for Obama administration coined the performance.” However, a better performance famous sentence for the late 2000s: “You never occurs also alongside with optimization in want a serious crisis to go to waste”. This seems allocation of resources and better business to be the silver lining approach in the current environment. That is, efficiency as well as Brazilian context: the ongoing crisis provides technology and education foster growth, given the opportunity for the country to do things the capital and labor stocks. Brazil has a huge that you could not before. The economic agenda space to grow based on increasing in efficiencies needs to tackle the situation, a medium-term through structural reforms that can improve spending-cut based fiscal consolidation program output growth, given its stock of capital and labor. rather than the short-term tax hikes based fiscal It is a sort of privilege of its stage of development. adjustment, having in mind the other reforms6. Thus, economic and political reforms, A compreehensive and bold social security alongside with investment in education and in reform proposal aligned with the one currently infrastructure, are like low hanging fruits to be being discussed in the Congress that establishes reap shortly. Besides a new fiscal regime and realistic parameters for the next generations. the social security reform it includes: political, All in all, reaching consensus over the labor, tax, government administration including measures to be taken require rationality and a comprehensive program of privatization, commitment from politicians and the public independence in the central bank and an understanding that the current structure is independent fiscal authority, microeconomic broken and calls for a rational and realistic new reforms to leave the business environment one. A new system where the state can indeed friendly to long term investments, trade provide public services as rights, not privileges in openness, international financial integration, and a democratic, efficient and universal way. so on. Brazil could benefit to grow faster in a sustainable path through incentives for efficiency and quality. Another model for the state and its relationship with the private sector indicates a path towards long-run sustainable growth. Our Notes recommendations are far from liberal and naïve ideas of the state mainly because of the colossal 1 Faoro, R. (1958). This text appears only in its lack of efficiency of the Brazilian economy. original edition from 1958. In its second edition, in 1974, the author expressed differently this phenomenon but kept the same point. Conclusion There is no shortcut nor a miracle to put 2 Our initial research indicates around 500 state- the economy back on track. Brazilian society owned companies belonging to the federal has to come to terms with its set of priorities administration (about 154 companies), to the to face the consequences of its choices for a states (about 230 companies) and the remaining system that can provide adequate services with belonging to municipalities.

26 3 See Romer, D. 2012. Advanced Macroeconomics. McGrawHill, p9-17. The Solow residual describes productivity growth over the time. Robert Solow defined rising productivity as rising output with constant capital and labor input. It is a “residual” because it is the part of growth that cannot be explained through capital accumulation or increased labor.

4 As defined by the US Department of Labor’s Bureau of Labor Statistics.

5 Coelli, T. et al. 2005. An introduction to efficiency and productivity analysis. Spring.

6 However, in a “crony-capitalism state” as the Brazilian one, privileges were still being distributed as civil servants were awarded with high increases in their earnings.

27 PUBLIC SECTOR CORRUPTION IN REGIONAL PERSPECTIVE1

Some of our earliest records of corruption Paul Lagunes is an Assistant Professor at Columbia in Latin America come from a secret eighteenth- University’s School of International and Public Affairs. century report (Juan and de Ulloa 2011 [1749]). His research focuses on corruption, especially as it The report provides a detailed account of affects subnational governments in the Americas. corruption in the territory we know today as Two basic questions motivate Lagunes’s research: Peru and Ecuador. It describes how viceroys First, how does corruption actually work in practice? sold public offices; members of the judiciary Second, what tools are available for limiting auctioned off verdicts; and customs officials corruption’s harmful effects? By relying on randomized allowed merchants to import goods at reduced control trials, Lagunes offers insights on corruption’s tax rates. Strikingly, much of the corruption regressive impact on society, the factors maintaining detailed in the historical report is similar to the a corrupt status quo, and the conditions under which anti-corruption monitoring is most effective. corruption we observe today. The implications of this last statement are as profound as they are troubling: the spread of electoral democracy, speak openly about the unsavory, for researchers the implementation of market-oriented reforms, assure us that Latin American countries are and the adoption of transparency legislation have among the most burdened by corruption in the failed to reverse historical patterns. Corruption world (Morris and Blake 2009 2). stubbornly thrives in Latin America. Fortunately, a small number of Latin Studying corruption is difficult. The corrupt American countries—among them, Uruguay have an obvious interest in concealing their illegal and Costa Rica—have made notable progress in ventures. Still, by looking at the available data the fight against corruption (Buquet and Piñeiro we find that corruption is perceived at much 2015; Wilson and Villarreal Fernández 2015), but higher levels in Latin America than in wealthier, the same cannot be said about most the of the OECD-member countries (Jarquín and Molina neighborhood. Corruption indicators in the region 2016 12). This fact alone is unsurprising. What is have remained relatively unchanged over time more surprising is that according to victimization (Rehren 2009 50). More than seventy percent of surveys only between ten and twenty percent Latin Americans perceive public officials in their of Latin American residents admit to having respective countries to be corrupt (Lagos 2001 & firsthand experience with corruption (Riaño, 2003 in Rehren 2009 47). Thus, taken at face value, Hodess and Evans 2009 7; Zechmeister 2014 victimization data on corruption is misleading: 144). Those surveyed are probably hesitant to corruption is anything but a marginal problem. 28 For additional evidence on the extent a million protestors took to the streets (Watts to which corruption affects the region, we can 2013). What had started as a small demonstration look to some of the recent scandals. In Mexico, against a nominal increase of bus fares in São President Enrique Peña Nieto and his family Paulo grew dramatically. Protesters called for were living in a luxurious home built and owned an end to corruption and expressed anger at by Grupo Higa, a construction conglomerate the billions spent on new stadiums for the 2014 that had obtained major contracts from the World Cup rather than on public services. Then, government (Redacción AN 2014). Chile, in the presidential election of 2014, another form the country that often tops Latin America’s of protest emerged: Rousseff was reelected, but performance indicators, witnessed its own only by the narrowest margin of victory in modern case of conflict of interest. President Michelle Brazilian history (The Economist 2014a). It is in this Bachelet’s son was accused of using political political context that the Lava Jato affair unfolded. connections to obtain a ten-million-dollar bank According to allegations, the Lava Jato loan (Reuters 2015). The loan was granted a scheme involved skimming a fraction of the value day after Ms. Bachelet was reelected (Romero of Petrobras’s contracts between 2004 and 2014 2015). In Guatemala, a UN-backed agency played in order to fund personal and party accounts a pivotal role in uncovering a multi-million-dollar (Leahy 2014). Over two billion dollars appear to customs fraud case involving President Otto have been paid in bribes (Editorial Board 2016). Perez Molina (Goldman 2015). Perez Molina To this day, more than one hundred individuals, resigned and so joined the growing list of Latin including thirteen senators, twenty-two American presidents who, since 1990, have federal deputies, and two governors are under been removed from office prematurely because investigation (Casas-Zamora and Carter 2016). In of corruption. The list includes Carlos Andrés the midst of this scandal and a shrinking economy, Pérez of Venezuela, Fernando Collor de Mello of Brazil’s legislature voted to approve Rousseff’s Brazil, and Alberto Fujimori of Peru (Naím 2005; impeachment on account of unrelated financial Pérez-Liñán 2007). improprieties (Beauchamp 2016; Jacobs 2016). A discussion about failed presidencies Even if sixty percent of the lawmakers who inevitably brings us to recent events in Brazil. voted for the impeachment were facing serious The Lava Jato scandal surrounding Petrobras, charges of their own (Romero and Sreeharsha the state oil company, hit Brazil while another 2016), the evidence shows that Brazil’s law prominent scandal was still fresh in people’s enforcement authorities have reacted forcefully memories. Mensalão was a corruption scheme to corruption. To date, authorities have made that unfolded during former President Luiz nearly two hundred arrests and over one hundred Inácio Lula da Silva’s first term in office. Coalition convictions (Pearson 2016). Among those sent parties were given large, clandestine payments to jail is the ex-CEO of Latin America’s largest each month to support the Workers Party (The construction group (Dickerson, Magalhaes and Economist 2013b). News about the scheme broke Lewis 2016). in 2005 when a congressman publicly accused In summary, there is strong evidence that the Workers Party of bribing political allies (Staff Brazil gets the prosecutorial aspect of corruption 2013a). The Supreme Court took up the case and control right. However, the fight must not rely the trial began in mid-2012 (Bodart 2013). solely on jailing those who violate the law. The In the interim, the Workers Party won country’s legislators also need to work to limit the two more presidential elections—one of which extreme political fragmentation observed today. placed Dilma Rousseff, a trained economist and Brazil has over two-dozen parties, and members close ally of Lula’s, at the head of Brazil’s highest of Congress are constantly renegotiating their political office. political loyalties. From Fernando Collor de Melho Rousseff began her presidency by firing a to Luiz Inacio Lula da Silva, the rules of the game series of high-level officials because of corruption have provided an incentive for presidents to apply (Forero 2011). However, the axe-wielding did not questionable tactics in order to sustain governing matter much by June 20, 2013. On that day, over coalitions. But this needs to stop. Brazil needs

29 long-term solutions to the corruption problem. Forero, Juan. “In Her First Year, Brazilian President President Temer has raised the possibility of Dilma Rousseff Cleans House.” The Washington reforms that would limit political fragmentation Post December 14. 2011, sec. World. (Mello & Spektor 2016 109). Instead of seeking to grant themselves immunity from prosecution Goldman, Francisco. “From President to Prison: (Reuters 2016), Brazilian legislators should pass Otto Pérez Molina and a Day for Hope in the political reforms that actually serve the Guatemala.” The New Yorker September 4. country’s needs. 2015, sec. News Desk.

Jacobs, Andrew. “Brazil’s Lower House of Congress Votes for Impeachment of Dilma Rousseff.” The New York Times Apriil 17. 2016, Notes sec. Americas.

1 Portions of this policy brief were published as Jarquín, María José, and Evelyn Molina. part of the following article: Lagunes, Paul. “What “Corruption and Transparency in Latin America Peru’s New President Can Learn from Brazil’s and the Caribbean at a Glance.” Inter-American Fight against Corruption.” The Conversation Development Bank, 2016. 70 of Institutional July 26. 2016. [To view the article visit: http://bit. Capacity of State (ICS) Division. ly/2amVadF] Juan, Jorge, and Antonio de Ulloa. Noticias Secretas De América. Nabu Press, 2011 [1749].

Leahy, Joe. “Petrobras Scandal Adds Fuel to Brazil’s Fiery Election Campaign.” Financial Times References October 15. 2014, sec. Americas Politics & Policy.

Casas-Zamora, Kevin, and Miguel Carter. Mello, Eduardo, and Matias Spektor. “Breaking an “Corruption in Latin America: An Analysis of Addiction to Bad Government.” Foreign Affairs the Current Context and Prospects for Its (2016): 102-110. Prevention and Control.” Unpublished Work: Inter-American Development Bank, 2016. 75. Morris, Stephen D., and Charles H. Blake. “Introduction: Political and Analytical Challenges Beauchamp, Zack. “Brazil’s Petrobras Scandal, of Corruption in Latin America.” Corruption Explained.” Vox March 18. 2016, sec. Explainers. & Democracy in Latin America. Eds. Charls H. Blake and Stephen D. Morris. Pittsburgh, PA: Bodart, Bruno. “Mensalão: The ‘Big Monthly University of Pittsburgh Press, 2009. 1-22. Payment’ Scandal in Brazil.” Latin American Series at Yale Law School. Unpublished Presentation at Naím, Moisés. “Tunnel Vision on Corruption.” the Yale Law School’s ‘: The The Washington Post February 20. 2005, sec. Mensalão Case’ Event: Yale Law School, 2013. Opinion Columns.

Buquet, Daniel, and Rafael Piñeiro. “The NYT Editorial Board. “Brazil’s Gold Medal for Uruguayan Way from Particularism to Corruption.” The New York Times June 6. 2016, Universalism.” European Research Centre for sec. Editorial. Anti-Corruption and State-Building, 2015. 20. Pearson, Samantha. “Brazil’s Corruption Probe Dickerson, Marla, Luciana Magalhaes, and Jeffrey Means a Boom Time for Lawyers.” Financial T. Lewis. “Odebrecht Ex-Ceo Sentenced to 19 Times June 20. 2016, sec. Brazil. Years in Prison in Petrobras Scandal.” The Wall Street Journal March 8. 2016, sec. World. 30 Pérez-Liñán, Aníbal. Presidential Impeachment Watts, Jonathan. “Brazil Erupts in Protest: More and the New Political Instability in Latin America. Than a Million on the Streets.” The Guardian Cambridge, MA: Cambridge University Press, June 21. 2013, sec. Americas. 2007. Wilson, Bruce M., and Evelyn Villarreal Fernández. Redacción AN. “La Casa Blanca De Enrique “Costa Rica’s Long, Incomplete Struggle against Peña Nieto (Investigación Especial).” Aristegui Corruption.” European Research Centre for Noticias November 9. 2014. Anti-Corruption and State-Building, 2015. 23.

Rehren, Alfredo. “The Crisis of the Democratic Zechmeister, Elizabeth J. The Political State.” Corruption & Democracy in Latin Culture of Democracy in the Americas, 2014: America. Eds. Charls H. Blake and Stephen D. Democratic Governance across 10 Years of Morris. Pittsburgh, PA: University of Pittsburgh the Americasbarometer. Online: Vanderbilt Press, 2009. 46-59. University, 2014.

Reuters. “Chilean President’s Son Resigns from Charity Amid Loan Scandal.” Reuters February 13. 2015, sec. World.

Reuters. “Brazil Legislators Vote against Anti- Corruption Bill Even as Nation Mourns.” The Guardian November 30. 2016, sec. Americas.

Riaño, Juanita, Robin Hodess, and Alastair Evans. Global Corruption Barometer. Online: Transparency International, 2009.

Romero, Simon. “Chile Joins Other Latin American Nations Shaken by Scandal.” The New York Times April 9. 2015, sec. Americas.

Romero, Simon, and Vinod Sreeharsha. “Dilma Rousseff Targeted in Brazil by Lawmakers Facing Scandals of Their Own.” The New York Times April 14. 2016, sec. Americas.

Staff. “Q&A: Brazil’s ‘Big Monthly’ Corruption Trial.” BBC November 16. 2013a, sec. Latin America.

Staff. “Brazil: Corruption: Former Chief-of-Staff Jose Dirceu Sentenced.” BBC May 18. 2016, sec. Latin America.

The Economist. “What Is Brazil’s ‘Mensalão’.” The Economist November 18. 2013b, sec. Explaining the world, daily.

The Economist. “Diehard Dilma.” The Economist November 1. 2014a.

31 BRAZIL: THE CHALLENGE OF PRODUCTIVITY

For three and one half decades, the José Alexandre Scheinkman is Professor of growth of the Brazilian economy has been Economics at Columbia University. He has served as disappointing. Although Brazil’s capital formation a consultant to several financial institutions and serves and educational improvements have not been on the board of Cosan Limited, a NYSE listed company brilliant, the main reason for the low growth has engaged in the production and distribution of sugar, been the dismal performance of (total factor) ethanol and . Scheinkman is a Member productivity – the measure of how much a country of the National Academy of Sciences, Fellow of the produces in goods and services with a fixed American Academy of Arts and Sciences, Fellow of the amount of factors of production, capital and labor. Econometric Society, Corresponding Member of the Whereas productivity in China, Brazilian Academy of Sciences, and received a “docteur Korea, Taiwan or India is growing much faster honoris causa” from the Université Paris-Dauphine. than US productivity, helping to narrow the difference in output per worker vis-à-vis the developed world, Brazilian productivity barriers to trade and the lessening of government relative to the US’s fell 20% since 1990. controls over production and exports of It is impossible to imagine Brazil agricultural products were crucial for the growing fast for a considerable period, revolution in Brazilian agribusiness. However, unless we tackle the problems that even earlier, in 1973 the government created depress the country’s productivity growth. Embrapa, charged with generating R&D for the Some good news: While growth of Brazilian agricultural and livestock industries. productivity has been mediocre overall, there Among Embrapa’s many achievements were are sectors, such as financial intermediation technological advances that allowed Brazilian or agriculture, in which productivity grew farmers to occupy the Cerrado, a formerly fast. In contrast, growth of productivity in degraded region that nowadays accounts manufacturing in Brazil has been a dismal failure. for nearly 50% of Brazil’s grain production. 1 Agribusiness: In 1960 Brazil imported Embrapa’s R&D and the deregulation of 30% of its food consumption. The country was the 1990s created the conditions for the migration a net importer of poultry, meat and cereals. of producers to new areas and for an increase in Agriculture was highly regulated. A government scale of operations. The performance of Brazilian license was needed to import a bushel of wheat agriculture since then has been spectacular. or to export a pound of sugar. The reduction of In 1990-2009, the increase of productivity of 32 was 160% of the increase Notes in productivity in agriculture in the US. Improving productivity: Although 1 Vieira and Fishlow (to appear) provide an excellent productivity is an aggregate measure, individual history of the agricultural revolution in Brazil. firms engender productivity growth. A productivity agenda should aim at facilitating the entry and growth of the more efficient firms and 2 See Foster, Haltwanger and Krizan (2001). the exit of less efficient competitors. The evidence shows that this churning is responsible for an important share of productivity growth in the References US 2. Unfortunately this mechanism seems to be much less operative in Brazil, allowing too many Foster, L.; J. Haltwanger & C. J. Krizan small and inefficient firms to survive and depress (2001): “Aggregate productivity growth”; New average productivity. One of the reasons less developments in productivity analysis, University efficient firms survive is that the tax system favors of Chicago Press. small firms. The current myriad of taxes that are paid in the supply chain (IPI, ICMS, Pis, Cofins, Lisboa, M.; N. Menezes-Filho; A. Schor (2010): ISS) should be replaced by a value-added tax with “The effects of trade liberalization on productivity a single tax rate for all firms. More generally, growth in Brazil: competition or technology?”; Brazil’s complicate legal system, including labor Revista Brasileira de Economia. law, and the role of the state in providing credit subsidies and tax–exemptions, favors producers Vieira, J. and Fishlow A. (to appear): A revolução with good connections instead of efficient firms. da agricultura tropical comparada no Brasil: ciência, Brazil’s abysmal infrastructure depresses tecnologia e produtividade. productivity in many sectors. The country needs to implement new regulation to attract private players to produce infrastructure services. Using firm-level data, Lisboa, Menezes and Schoor (2010) document that the relatively limited lessening of trade barriers in 1990s resulted in productivity gains for Brazilian firms because it gave them better access to inputs and capital goods. Further reduction in tariffs and non-tariff barriers would allow Brazilian firms to use better inputs and capital goods to improve productivity. Many Brazilian programs to incentivize R&D have not shown effectiveness. However the international experience and Brazil’s own Embrapa show that well designed government programs to produce or promote R&D have enormous effects in productivity. The success in agriculture, a sector that still suffers from a difficult legal environment, barriers to imports of inputs and an inadequate infrastructure, shows that even limited progress in creating conditions to improve productivity can do much good.

33 Photo: Maria Eduarda Vaz 34 INTERVIEW SERIES

ABOUT

During the conference, we have organized a series of interviews produced by Canal UmBrasil. This project aimed to bring a series of foreign and Brazilian scholars to discuss the role played by the Brazilian state, how its policies and the current political crisis have affected and will affect the developments in Brazil’s economy. To watch the full interview series, please click here.

SPECIAL THANKS

David Caughlin FecomercioSP Monica Balanda Rachel Daza André Rocha Maria Izabel Collor de Mello Paula Dias Guilherme Baroli Nora Johnson

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