Brazil – Country Report

Introduction
The country has been expanding its presence in international financial and commodities markets, and is one of a group of four emerging economies called the BRIC countries. Although struggling with social inequality and infrastructural deficits we think that Brazil is already a great world power.
Also what attracted us to Brazil as a case study for this report is it’s exotic character. Not many people really know the extent of Brazil’s recent growth and improvements in social security and in overcoming poverty.
We expect the labor force and operational costs to be low, like in the other emerging countries like China. However we take in to consideration higher costs involving security and bureaucracy.
Chapter 1 – Short presentation of the country
The Federative Republic of Brazil is the largest country in both South America and the Latin America Region. It is the world's fifth largest country, both by geographical area and by population, with over 193 million people. It is the largest Lusophone country in the world, and the only one in the Americas.
Bounded by the Atlantic Ocean on the east, Brazil has a coastline of 7,491 km. It is bordered on the north by Venezuela, Guyana, Suriname and the French overseas region of French Guiana; on the northwest by Colombia; on the west by Bolivia and Peru; on the southwest by Argentina and Paraguay and on the south by Uruguay. Numerous archipelagos form part of Brazilian territory, such as Fernando de Noronha, Rocas Atoll, Saint Peter and Paul Rocks, and Trindade and Martim Vaz. It borders all other South American countries except Ecuador and Chile. Including its Atlantic islands, Brazil lies between latitudes 6°N and 34°S, and longitudes 28° and 74°W. (Also see Appendix 1)
The official denomination of Brazil is the Real (BRL), which exchanges at 2.0201 per Dollar (USD).
A member of the BRIC group, Brazil has one of the world's fastest growing major economies, and its economic reforms have given the country new international recognition and influence. Brazil is a founding member of the United Nations, the G20, CPLP, Latin Union, the Organization of Ibero-American States, the Organization of American States, Mercosul and the Union of South American Nations. Brazil is one of 17 megadiverse countries, home to a variety of wildlife, natural environments, and extensive natural resources in a variety of protected habitats. Brazil is considered a middle power in international affairs, and has been identified as an emerging power.
Administrative and political context
The federative state of Brazil is a "indissoluble union" with The Union, the States and the Federal District, and the Municipalities as the "spheres of government". The executive and legislative are organized independently in all three spheres of government, while the judiciary is organized only at the federal and State/Federal District spheres.
All members of the executive and legislative branches are directly elected. For most of its democratic history, Brazil has had a multi-party system, proportional representation. Voting is compulsory for the literate between 18 and 70 years old and optional for illiterates and those between 16 and 18 or beyond 70. Together with several smaller parties, four political parties stand out: Workers' Party (PT), Brazilian Social Democracy Party (PSDB), Brazilian Democratic Movement Party (PMDB), and Democrats (DEM). Fifteen political parties are represented in Congress. It is common for politicians to switch parties, and thus the proportion of congressional seats held by particular parties changes regularly.
The form of government is that of a democratic republic, with a presidential system. The president is both head of state and head of government of the Union and is elected for a four-year term, with the possibility of re-election for a second successive term. The current president is Dilma Rousseff who was inaugurated on 1 January 2011. The President appoints the Ministers of State, who assist in government. Legislative houses in each political entity are the main source of law in Brazil. The National Congress is the Federation's bicameral legislature, consisting of the Chamber of Deputies and the Federal Senate. Judiciary authorities exercise jurisdictional duties almost exclusively. Brazil is a federation composed of 26 States, one Federal district (which contains the capital city, Brasília) and Municipalities. States have autonomous administrations, collect their own taxes and receive a share of taxes collected by the Federal government. They have a governor and a unicameral legislative body elected directly by their voters. They also have independent Courts of Law for common justice. Despite this, states have much less autonomy to create their own laws than in the United States. For example, criminal and civil laws can only be voted by the federal bicameral Congress and are uniform throughout the country.
The states and the federal district may be grouped into regions: Northern, Northeast, Central-West, Southeast and Southern. The Brazilian regions are merely geographical, not political or administrative divisions, and they do not have any specific form of government. Although defined by law, Brazilian regions are useful mainly for statistical purposes, and also to define the distribution of federal funds in development projects. (Also see Appendix 2)

Demographic trends
Brazil’s population is estimated to be around 201,009,622 in July 2013, and was of 190,732,694 at the 2010 census. According to the three main age groups the population is distributed as follows:
0-14 years: 24.2% (male 24,814,906/female 23,879,697)
15-64 years: 68.5 % (male 68,171,213/female 69,420,200)
65 years and older: 7.3% (male 6,250,580/female 8,473,026) (2013 est.)
(Also see Appendix 3)
In the 1940s the annual population growth rate was 2.4%, rising to 3.0% in the 1950s and remaining at 2.9% in the 1960s, as life expectancy rose from 44 to 54 years and to 72.6 years in 2007. It has been steadily falling since the 1960s, from 3.04% per year between 1950 and 1960 to 1.05% in 2008 and is expected to fall to a negative value of –0.29% by 2050 thus completing the demographic transition. This may happen even sooner than 2050, as the Central Intelligence Agency already predicts a growth rate of 0.83% in 2013.
The overall population density of Brazil is about 20.5 inhabitants per square kilometer, although it varies widely from 410.9 and 356.1 inhabitants per square kilometer in Distrito Federal, respectively in Rio de Janeiro to as low as 2.1 and 1.8 in Amazonas and Roraima in the untamed Northwest. The population is heavily concentrated in the Southeastern (79.8 million inhabitants) and Northeastern (53.5 million inhabitants) regions, making them more favorable for business, while the two most extensive regions, the Center-West and the North, which together make up 64.12% of the Brazilian territory, have a total of only 29.1 million inhabitants. (Also see Appendix 4)
According to IBGE (Brazilian Institute of Geography and Statistics) urban areas already concentrate 84.35% of the population, which means that a large work force is readily available in urban areas. The largest metropolitan areas in Brazil are São Paulo, Rio de Janeiro, and Belo Horizonte - all in the Southeastern Region - with 19.5, 11.5, and 5.1 million inhabitants respectively.
Roman Catholicism is the country's predominant faith. Brazil has the world's largest Catholic population. According to the 2000 Demographic Census (the PNAD survey does not inquire about religion), 73.57% of the population followed Roman Catholicism; 15.41% Protestantism; 1.33% Kardecist spiritism; 1.22% other Christian denominations; 0.31% Afro-Brazilian religions; 0.13% Buddhism; 0.05% Judaism; 0.02% Islam; 0.01% Amerindian religions; 0.59% other religions, undeclared or undetermined; while 7.35% have no religion. However, in the last ten years Protestantism, particularly Pentecostal and/or Evangelical Protestantism, has spread in Brazil, while the proportion of Catholics has dropped significantly. The cities of Boa Vista, Salvador and Porto Velho have the greatest proportion of irreligious residents in Brazil. Teresina, Fortaleza, and Florianópolis were the most Roman Catholic in the country. Greater Rio de Janeiro, not including the city proper, is the most Irreligious and least Roman Catholic Brazilian periphery, while Greater Porto Alegre and Greater Fortaleza are in the opposite sides of the lists respectively.
The core culture of Brazil is derived from Portuguese culture, because of its strong colonial ties with the Portuguese empire. Among other influences, the Portuguese introduced the Portuguese language, Roman Catholicism and colonial architectural styles. The culture was, however, also strongly influenced by African, indigenous and non-Portuguese European cultures and traditions.
From the 19th century, Brazil opened its borders to immigration. About five million people from over 60 countries migrated to Brazil between 1808 and 1972, most of them of Portuguese, Italian, Spanish ,German, Japanese and Middle Eastern origin. The CIA estimates at net migration rate of -0.17 migrant(s)/1,000 population for 2013, ranking 115 in the world.
Institutional framework. Transport and telecommunication infrastructure
Brazilian law is based on Roman-Germanic traditions and civil law concepts prevail over common law practice. Doctrinal works and the works of academic jurists have strong influence in law creation and in law cases.
The legal system has been criticized over the last few decades for the slow pace of decision making. Lawsuits on appeal may take several years to resolve, and in some cases more than a decade elapses before definitive rulings. Nevertheless, the Supreme Federal Tribunal was the first court in the world to transmit its sessions on television, and also via YouTube. More recently, in December 2009, the Supreme Court adopted Twitter to display items on the day planner of the ministers, to inform the daily actions of the Court and the most important decisions made by them.
Many financial publications mention a concept known as The Brazil Cost, meaning the increased operational costs of doing business in Brazil (Also see Appendix 5). Brazilian goods and services are more expensive compared to other countries like China and India because of several factors, including: * Underdeveloped infrastructure, including a deteriorated network for domestic shipping by rail, highway and coastal navigation*; * Legal uncertainty**; * The economy divided into cartels**; * High levels of corruption within the public sector**; * High crime rate, which adds extra security costs; * High electricity cost; * High social security costs; * Complex and inefficient fiscal legislation**; * Low education levels and lack of qualified labor; * Inefficiency of public services**; * Excessive layers of bureaucracy**; * High tax burden***.
*: In 2007 transport costs consumed 13% of GDP, 5% more than in the United States. The high transport costs are exacerbated by the scattering of industry over Brazil's territory. Because of the deficit in railway infrastructure the transport cost per ton of soybean is the equivalent of R$ 35 in the USA, it is R$ 160 in Brazil.
**: It takes about 120 days to start a business in Brazil, four times longer than in China and India.
***: Scores of Honda City’s leave the Honda factory near Campinas, Brazil, are shipped to Mexico, and sold there for R$ 33,500. The same model, from the same factory, costs R$ 53,600 in Brazil.
Nevertheless, transportation wise, Brazil holds the 2nd place in the world for number of airports, the 4th in roadways and the 10th in railways, although the last method has high deficits.
In terms of communications infrastructure Brazil has relatively stable land lines accounting for a ratio of 20 per 100 persons, meanwhile the less expensive mobile technology has been a major driver in expanding telephone services. It is also the landing point for a number of submarine cables and satellite earth stations.
President Dilma Rousseff declared that Brazil must cut its high business costs to become more competitive and vowed to keep inflation in check. The leader anticipated that 2013 will be a year of major infrastructure investments in roads, railways, ports and airports to try to stop bottlenecks from holding the economy back. The next step will be reducing corruption. (Also see Appendix 6)
The country will host the World Cup in 2014 and the Olympic Games in 2016, demanding massive investments in urban and social development as well as in transport infrastructure.

Chapter 2 - Macroeconomic Environment and economic development
Characterized by large and well-developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries, and Brazil is expanding its presence in world markets. Since 2003, it has steadily improved its macroeconomic stability, building up foreign reserves, and reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments. In 2008, Brazil became a net external creditor thanks to an investment-grade debt rating given by S&P backed up afterwards by Moody’s, the two biggest rating agencies in the US. Due to this rating upgrade, many foreign investments entered the country, allowing investment and pension funds to legally invest in the country and in Brazilian bonds. After strong growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in 2008. Brazil experienced two quarters of recession, as global demand for Brazil's commodity-based exports dwindled and external credit dried up. Unemployment is at historic lows and Brazil's traditionally high level of income inequality has declined for each of the last 14 years. Brazil's historically high interest rates have made it an attractive destination for foreign investors. Large capital inflows over the past several years have contributed to the appreciation of the currency, hurting the competitiveness of Brazilian manufacturing and leading the government to intervene in foreign exchanges markets and raise taxes on some foreign capital inflows. President Dilma ROUSSEFF has retained the previous administration's commitment to inflation targeting by the central bank, a floating exchange rate, and fiscal restraint. In an effort to boost growth, in 2012 the administration implemented a series of more expansionary monetary and fiscal policies that have failed to stimulate much growth.
Brazil performed better than many other economies in the face of the global economic crisis. This impressive macroeconomic performance was due mainly to rising domestic demand, spurred above all by public policies aimed at increased spending and financing, especially for investment. However, the country could be dragged back by the excessive public intervention, low saving rates, slow progress of economic reforms and private sector imbalances.
Despite many reforms during the Lula administration and serious social improvements, Brazil has one of the highest levels of inequalities in the world. Millions of Brazilians have moved in better living conditions and income inequality has been reduced with the help of low inflation levels and solid economic growth. Still a percentage of 5.2% of the population lives on less than $1.25 per day.
As one of the leading nations on climate negotiations, it has committed voluntarily to reducing its greenhouse gas emissions by between 36.1% and 38.9% until 2020.

GDP
With a Gross Domestic Product (GDP) of US$ 2,223 trillion in 2012, Brazil is the world's seventh wealthiest economy.
It was one of the first emerging markets to begin a recovery. From a decrease in GDP of almost 5.5% in the mist of the crisis to -0.33% in 2009, consumer and investor confidence revived in 2010 and GDP growth reached 7.5%, the highest growth rate in the past 25 years. Rising inflation led the authorities to take measures to cool the economy; these actions and the deteriorating international economic situation slowed growth to 2.7% in 2011, and 1.5% in 2012. Despite a slower growth, in 2011 Brazil overtook the United Kingdom as the world's seventh largest economy in terms of GDP.
The 2010 record growth was due to an increase in exports of 11.5% and 36.2% in imports. Also a 18.4% rate of GDP went to investments. Industrial employment had the highest rate in the last 6 years, amounting to a growth of 3.4%.
GDP/capita
The GDP per capita is on a continuous growth path from $7.400 in 2000 to $11.900 in 2011, each year being better than the last, except in 2009 when it faced a slight decrease of $100 per citizen due to the world economic downfall. However, Brazil’s perspective looks promising showing a continuous economic growth and increase in production. It is also, proof of increased standard of living. (also see Appendix 7)
Real growth rate
The real growth faced a powerful deceleration in 2009 when after 5.1% in 2008, decreased to -0.2%, going into the negative side. However in 2010, the recovery matched and exceeded the downfall, with an increase to 7.5%, the highest in the last 20 years. The GDP growth of 7.5%, decelerated to 2.7% in 2011, industrial output and investment demand were affected disproportionately. (see Appendix 3)
Also, tax revenue, including payroll taxes, increased with 13% in real terms in 2010 compared with 2009 and government spending rose by 12% in real terms in the same period. These increases were due to major social security benefits and wages.
Real GDP growth has strengthened under the impact of the government’s stimulus plan launched in early 2012. The package was focused on infrastructure investments and tax cuts. These measures were designed to find a remedy against sluggish investment and to offset the effects of both the euro zone’s recession and the real over-appreciation on exports

GDP by: a) Main economic sectors
The most important economic sectors in Brazil are agriculture, industry and services.
The government supports industrialization and direct investment in industry with subsidies and trade protection for Brazilian industrial products. As such it uses import taxes to protect many Brazilian industries against international competition. These industries include textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, and other machinery and equipment. The footwear industry is the most important finished good exported from Brazil. Government-owned Petrobras and Brazilian Aeronautics Enterprise are important companies headquartered in Brazil that produce oil and aircraft, respectively. The industrial sector represented in 2011 27.53% of GDP, more than 5 times than the agriculture sector, with an increase from 2009 of almost 11%.
In the agriculture sector, Brazil is one of the world's largest producers of soybeans and coffee. International competitors watch Brazil's weather to determine the success of the soybean and coffee season, setting international prices based on Brazil's harvest. In 2011, it represented 5.46% of GDP, with an increase of 3.9% from the previous year following an increase of 6.33% from 2009, where it recorded a decline of 3.11% of GDP.
The most important developed sector of the Brazilian economy is the services sector, due mainly to tourism. It represented in 2011 67% of GDP, more than the two other sectors combined, the sector oscilating with +/- 1% each year depending on the economic overview. b) Private and public consumption
The Brazilian government continues to dominate many areas of the country’s economy, undercutting development of a more vibrant private sector. The efficiency and overall quality of government services are inadequate, and the government seems to be more skilled at collecting taxes than at implementing needed reforms.
In the most recent year, total government expenditures, including consumption and transfer payments, amount to 41 percent of GDP; public debt is just below 40 percent of GDP. Besides debt service, government spending is focused mainly on pensions, transfers to local governments, and funding the bureaucracy. Public-sector wages and transfer payments account for more than 70 percent of the country’s primary spending.
Brazil's consumer sector has also been supported by its demographic and socio-economic structure. The economically active population has grown at 2.3 % per year since the start of the decade, continuously expanding the number of consumers.
Brazilian consumers have recently discovered credit: credit outstanding to households grew from 18% to 44% of disposable income in under a decade. However the cost of credit in Brazil, at 20-25% in real terms, is very high. Not surprisingly, defaults are rising and credit growth may be slowing.
The Index of Economic Freedom
Brazil’s economic freedom score is 57.7, making its economy the 100th freest in the 2013 Index. Its score is 0.2 point worse than last year, with gains in freedom from corruption and fiscal freedom offset by declines in labor and monetary freedoms. Brazil is ranked 19th out of 29 countries in the South and Central America/Caribbean region, and its overall score is below the world average.
The foundations for long-term economic development remain fragile in Brazil due to the absence of an efficiently functioning legal and regulatory framework. The state maintains an extensive presence in many sectors, and the legacy of decades of central planning is a substantial tolerance for state meddling in economic activity, even where it has demonstrably failed. Despite some progress, corruption continues to be pervasive.
Progress with market-oriented reforms has been uneven. The burdensome regulatory environment discourages private-sector growth and hampers realization of the economy’s full potential. Increasing inflationary pressure poses a risk to overall macroeconomic stability. Business confidence has floundered, with foreign investments declining about 40 percent in the first half of 2012.

Contracts are generally considered secure, but Brazil’s judiciary system is inefficient and subject to political and economic influence. Though protection of intellectual property rights has improved, piracy of copyrighted material persists.
Corruption continues to undermine the economic freedom, although President Rousseff has ousted six cabinet ministers in response to a public backlash and mobilization against lax governance standards.

The fiscal freedom score of the country is 70.3, being the 135th country in the world. The income tax rate is 27.5 percent. The standard corporate tax rate is only 15 percent, but a financial transactions tax, 10 percent surtax, and 9 percent social contribution on net profits bring the effective rate to 34 percent. The overall tax burden amounts to 32.5 percent of GDP and attempts at fiscal stimulus have added to a history of chronic public deficits. Public debt, however, has been relatively stable.

The business freedom score is 53, bringing the country on the 136 place in the world classification. Progress in improving the regulatory framework is hard and bureaucratic hurdles remain common, including lengthy processes for launching a business and obtaining permits.
The non-salary cost of employing a worker adds to the cost of doing business, and labor regulations remain stringent. Inflation has increased as the Banco Central do Brasil has cut interest rates in the face of sluggish demand and an overvalued currency.

Investment freedom brings Brazil on the 98th place with a score of 50. This is due to the fact that foreign investors are generally granted national treatment, but their activity is restricted in some sectors.
The trade-weighted tariff rate is 7.6 percent. Non-tariff barriers and the use of antidumping measures are a cause for concern. Foreign investors are generally granted national treatment, but their activity is restricted in some sectors. A complex tax and regulatory environment challenges investors. The banking sector emerged relatively unscathed from the global downturn, with credits to the private sector increasing.
The perceived corruption index
Brazil ranked 73rd out of the 183 countries in the corruption index. The index ranks countries according to their perceived level of corruption in the public sector, using data gathered from assessments and opinion surveys carried out by independent institutions.
With an overall score of 3.8, (with 9.0 – ten being very clean and zero – 0.9 being very corrupt), Brazil was ranked in thirteenth place out of the Americas.
Despite several high-profile government corruption scandals this year, Brazil found itself in third place out of the South American countries, behind Chile (7.2) in first place, (beating the US for the second year in a row), and Uruguay in second place with a score of seven.
Levels and evolution of inflation
In Brazil, the main components of the consumer price index are: food, alcohol and tobacco (31 %), transport (15 %), real estate (12 %), health care (11 %), clothing (9 %), communication (5 %) and education (4 %). The national index is calculated as the weighted average of the regional indexes. The largest contributors to the national index are: Sao Paulo (32 %), Rio de Janeiro (12.5 %), Belo Horizonte (11 %), Porto Alegre (8.4 %) and Curitiba (7.8 %).
The inflation increased from 2007 low of 3.64 to 5.66% just before the crisis broke out fluctuated around 5% in the following two years before it rose to 6.64% in 2011
Inflation pressures have emerged. To prevent excessive currency fluctuations and safeguard financial stability the authorities initially combined increases in interest rates and reserve requirements with foreign exchange intervention and a temporary tax on short term capital inflows. As the global outlook worsened, the policy mix was shifted toward easier monetary policy and some fiscal consolidation.
In 2013, the adopted policy mix should nonetheless fuel an upturn in activity. On the one hand, monetary policy is expected to be tightened because, despite the control on administered prices, higher commodity prices and wages could push the inflation rate above the maximum tolerance ceiling established by the central bank (6.5%).
Considering that global economic outlook is improving due to the lower financial tensions in Europe, the agreement avoiding the “fiscal cliff” in the US and the resilience of emerging economies, global growth is set to rise from 3.2% in 2012 to 3.6% in 2013 and 4.1% in 2014. In this situation, inflation will not recede this year, in spite of government’s strategic management of tax cuts and administered prices. The expected level of inflation will be close to 6.5% in the first half of 2013 and then decrease to 5.6% by the end of the year.(also see Appendix 9 and 10)

Chapter 3 – Human resources
The economic sectors from Brazil are split between Agriculture, with 20% of the labor force present within it, the industry sector withholds 14% of the present labor force, and 66% goes to the service industry.

Agriculture sector:
In the space of fifty five years (1950 to 2005), the population of Brazil grew from 51 million to approximately 187 million inhabitants, an increase of over 2 percent per year. In order to meet this demand, it was necessary to take the development of cattle and crop raising activities a step further. Since then, an authentic green revolution has taken place, allowing the country to create and expand a complex agribusiness sector. However, some of this is at the expense of the environment, including the Amazon.

Picture 1: Brazil’s agricultural lands
The importance given to the rural producer takes place in the shape of the agricultural and cattle-raising plan and through another specific program geared towards family agriculture (Pronaf), which guarantee financing for equipment and cultivation and encourage the use of new technology, as shown by the use of agricultural land zoning. With regards to family agriculture, over 800 thousand rural inhabitants are assisted by credit, research and extension programs. The special line of credit for women and young farmers is an innovation worth mentioning, providing an incentive towards the entrepreneurial spirit.
With The Land Reform Program, on the other hand, the country's objective is to provide suitable living and working conditions for over one million families who live in areas allotted by the State, an initiative capable of generating two million jobs. Through partnerships, public policies and international partnerships, the government is working towards the guarantee of an infrastructure for the settlements, following the examples of schools and health outlets. The idea is that access to land represents just the first step towards the implementation of a quality land reform program.
Over 600,000 km² of land are divided into approximately five thousand areas of rural property; an agricultural area currently with three borders: the Central-western region (savanna), the Northern region (area of transition) and parts of the Northeastern region (semi-arid). At the forefront of grain crops, which produce over 110million tones/year is the soybean, yielding 50 million tones.

Services sector
Considered one of the drivers of economic development in Brazil, in recent years the sector has helped to increase internal and external competitiveness has generated thousands of skilled jobs and has accelerated technological progress.
The Brazilian retail sector alone accounts for more than 1.4 million businesses (or 80% of the total), with total revenues of approximately R$ 1.6 trillion. The wholesale and vehicle sectors account for 17% and 10% respectively.
The Southeast region concentrates the majority of companies and workers in the commercial and services sectors in Brazil, and therefore has the largest wage bill and highest salaries in the sector, especially the States of São Paulo and Rio de Janeiro, whereas States in the North such as Acre, Roraima, Amapá and Tocantins are those with lowest labor rates in this sector.
The services sector, supported by the rise of around 30 million people into the middle class over the past decade, used to be one of Brazil's main growth engines, though it disappointed in the third quarter due to weaker activity in the financial sector.
Numbers show incoming new work in the service sector increased for the fourth straight month, however, suggesting a stronger contribution to GDP growth in the final three months of 2012.
With December's results, the Brazil Services moved from an average of 49.9 in the third quarter to 52.1 in the fourth quarter, a move that "reinforces expectations that the economy may be finally gaining some momentum at the end the year," said Andre Loes, chief Brazil economist at HSBC.
The PMI report showed the fourth straight month of job creation in the services sector in December, though at a slower pace than November.
Optimism over the outlook for the next 12 months eased to a three-month low, added Markit, which compiled the data for HSBC. (Source: www.reuters.com)
The combination of innovative social policies for the distribution of income, political and financial stability and transparency, sustainable growth and fiscal responsibility has led Brazil to establishing itself as a prime target for foreign investment.

With a population of over 190 million, of which more than 90 million are economically active, Brazil is the eighth largest consumer market in the world. Brazil is a world leader in the following sectors:
• Largest producer of regional aircraft and the fourth largest producer of commercial aircraft;
• Largest producer of coffee, oranges and guaraná;
• Largest producer of sugar cane (along with India);
• Largest producer of eucalyptus pulp;
• Largest exporter of beef and poultry and the fourth largest exporter of pork;
• Largest exporter of sugar and orange juice;
• Largest exporter and second largest producer of ethanol;
• Second largest exporter of soy complex (grain, meal and oil);
• Second largest producer of iron ore;
• Second largest producer of organic food;
• Third largest producer of soft drinks;
• Third largest consumer market for cosmetics;
• Third largest producer of shoes;
• Third largest producer of bauxite;
• Third largest producer of fruits;
• Third largest producer of GM foods.
Brazil is also recognized as one of the largest producers of foodstuffs (it is the country that has the most available space to expand agricultural frontiers and has the largest area of arable land on the planet) and has the most advanced banking system in the world.
It is no wonder that Brazil is the dominant force in the region's economy, accounting for half the GDP of South America and the largest and most diversified industrial base in Latin America and the Caribbean. Gateway to Mercosul, Brazil has borders with ten countries: Argentina, Bolivia, Colombia, French Guiana, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela.
Another international recognition of the country's economic stability was the conquest of a safe investment rating in 2008. In 2011 alone, foreign direct investment in Brazil reached US$ 69.1 billion, or 2.78% of GDP.
The volume of foreign investment will remain strong with the approach of international events to be held in Brazil - such as the World Cup (2014) and the Olympics (2016) - and with the development of pre-salt oil & gas reserves along a coastal strip of 800 km between the States of Espírito Santo and Santa Catarina, with deposits of oil (with low viscosity and high value) and gas at a depth of 6,000 meters, below a salt layer in the Atlantic Ocean.
Already self-sufficient in oil (it produces more than it consumes), projections indicate that with the pre-salt reserves, Brazil could become the world's sixth largest producer of oil by 2030.
Confidence in Brazil was strengthened by the way in which it confronted the financial crisis that hit several countries in 2008, stimulating national consumer market with tax cuts. The following year, the International Monetary Fund (IMF) invited Brazil to join the Institution's group of creditors. The country moved from being a debtor to a creditor.
Brazilian foreign reserves reached a record US$ 350 billion in 2011, the sixth largest stock of foreign reserves in the world, behind China, Japan, Russia, Saudi Arabia and Taiwan.
Thanks to these and other countries, Brazil has managed to beat successive export records for increasingly diverse products (more than US$ 256 billion), the leaders being minerals and foodstuff. China, USA, Argentina, Holland, Japan, Germany, Italy, Chile, UK and Spain are the ten countries to which Brazil exports the most.
The solidity of the Brazilian economy is further demonstrated by the adoption of more stringent standards than the international norm in the national financial system, the consolidation of the system of target in the control of inflation, floating exchange rates, maintaining unemployment at historically low levels and increasing the purchasing power of the population (up 19% between 2003 and 2010), underpinned by a policy of increasing the national minimum wage through adjustment for inflation over the previous two years plus the percentage growth in GDP of the immediately preceding year.
Although Brazilian per capita income remains low compared to developed countries (US$ 12,500 in Brazil compared with US$ 40,000 in the UK, for example), it has tripled in the last decade. In almost 20 years more than 29 million Brazilians have crossed the poverty line. The numbers in Class E (monthly family income up to R$ 751) and D (family income between R$ 751 and R$ 1,200 per month) declined from 93 million in 1993 to 63 million in 2011, according to the Getulio Vargas Foundation (FGV). The number of Brazilians in Class C (family income between R$ 1,200 and R$ 5,174) rose from 46 million to 105 million in the same period.
Also contributing to the reduction in inequality was an increase in the availability of assistance for the elderly and the disabled, and expansion of income transfer policies such as 'Bolsa Familia' - Family Aid and 'Brasil sem Miséria' - Brazil without Misery.
Gini Index
The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability"
The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income). However, a value greater than one may occur if some persons have negative income or wealth. For larger groups, values close to or above 1 are very unlikely in practice however.
High inequality threatens a country’s political stability because more people are dissatisfied with their economic status, which makes it harder to reach political consensus among population groups with higher and lower incomes. Political instability increases the risks of investing in a country and so significantly undermines its development potential.
High inequality may discourage certain basic norms of behavior among economic agents (individuals or enterprises) such as trust and commitment. Higher business risks and higher costs of contract enforcement impede economic growth by slowing down all economic transactions. These are among the reasons some international experts recommend decreasing income inequality in developing countries to help accelerate economic and human development.
The Gini index for Brazil was 54.69%, which shows that the dispersion of wages is not equal within the country. There is only a small part of employees that take part of the middle class, and a higher than normal amount of people under or near the poverty line and in the high income class.
The Gini index will lead us to the Lorenzo curve, which is describing inequality among the size of individuals’ wages. You can see the representation of the Lorenz curve (the curve of Brazil compared with the Hungary’s) in the appendix 14.

Literacy and unemployment rate
In 2010, the illiteracy rate was 7.5% and among the youth (ages 15–19) 1.74%. It was highest (20.30%) in the Northeast, which had a large proportion of rural poor. Illiteracy was high (24.18%) among the rural population and lower (9.05%) among the urban population. Another source (www.oecd-ilibrary.org) shows us a different approach of illiteracy calculation: combined with the unemployment numbers among various ages: the unemployed or educated rate between ages 15-19years old was of 14%, and between 20-24 years old was of 23.3% in 2010. I believe that these two classes are strongly related between them, as the biggest sector in the industry is the service sector. In my opinion, the service sector requires the most of the highly educated population, because of the use of technology. As the services sector is continuous expansion, I believe that the level of literacy must go up according to the speed of the services sector increasing pace, which in the present, is not happening. Given the amount of money that the Brazilian government is pumping into the educational sectors (5.6% of the total GDP), which as a percentage is an average distribution of budget in a country, seems not to be enough to fight back the illiteracy rate which is decreasing too slow in relation with the required literacy rate increase required by the working sectors at the moment.
On the other hand, Brazil has a huge amount of terrain that could still be used for the agriculture, and in my opinion, it is not used at its full capacity. So we can say that the agriculture sector has a big potential growth and could increase the GDP of Brazil with a significant amount. This will require a high support from the middle class, because that is what the agriculture sector will require as labor consumption.
Middle class comprised 15% of the Brazilian population in the early 1980s, and now they encompass nearly a third of the country's 190 million inhabitants. It rose thanks to Brazil's good economic performance in the recent years, poverty reduction policies, new work opportunities, and a better-educated workforce.
Among other topics, the study analyzes the consumption boom spurred by the rise in Brazilian households with strong purchasing power. This trend is expected to continue in the following years. “Buying anything – a TV, a car – is easier than it was years ago, because there is more credit available,” Almeida says.
Plane tickets, for example, are one of the most purchased items among Brazil's emergent middle class. Between July 2011 and July 2012 alone, 9.5 million Brazilians flew for the first time, according to Data Popular, a think-tank based in São Paulo.
The consumption boom, however, poses a risk: Brazilian middle-class households may be saving too little. Families could become over indebted and vulnerable in the long term if Brazil's economy slows down, according to the report.
Ever since household survey data became available in the 1970s, Latin America has been the world’s most unequal region, rivaled only by certain countries in Sub-Saharan Africa.
Over the last decade, however, the combination of sustained economic growth and inequality reduction resulted in substantial drops in absolute poverty.
From 2003 to 2009, the middle class has grown 50% in Latin America. Brazilian middle class alone contributed more than 40% of the overall increase in the region, according to the study.
Chapter 4 - The External sector of the economy
Current account of the balance of payments
Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. And a current account surplus is usually associated with trade surplus. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus as the value interest or dividends generated abroad is bigger than the value of interest or dividends generated from foreign capital in the country. Net transfer payments are very important part of the current account in poor and developing countries as workers' remittances, donations, aids and grants and official assistance may balance high trade deficits.

Source: WorldBank
The Brazil Current Account reached an all-time high of 13.985 US$ Billion in 2005 due to booming exports and a record low of -58.48 US$ Billion in January of 2011 following a descending trend. Current Account in Brazil is reported by the Banco Central do Brasil from 1980. The persistent current account deficit reflects a gap between saving and investment in the economy, which has been financed by a considerable amount of capital inflows. Due to the strong Brazilian real currency and the rising personal incomes Brazilians spent a record of more than US$21 billion on overseas travel in 2011, rolling up a deficit in the country's travel accounts of US$14.5 billion. The gap in travel accounts in 2010 was US$10.5 billion. As in past years, the current account gap was more than covered by rising foreign direct investments, according to the Central Bank. Foreign direct investment hit a record of $66.7 billion in 2011, up from $48.5 billion the previous year. As we can see, deficit in a country's current account makes it more dependent on financing from abroad.
Foreign Trade
In 2011, Brazilian foreign trade registered the peak mark of US$ 482.3 billion in its flow, a growth by 25.7% over 2010, when US$ 383.7 billion were traded. Brazil is a member of numerous economic organizations, including Unasul, WTO, Mercosul, G-20 and the Cairns Group. Brazil has an export-oriented economy and hundreds of trading partners, with 60 percent of its total exports made up of manufactured and semi manufactured goods. Exports reached US$ 256.0 billion, and imports were US$ 226.2 billion, also peak marks. Considering 2010, exports increased 26.8% and imports by 24.5%. Those significant growths indicate the progressive solidity of Brazilian insertion in the international commerce.
Imports and exports
An import is any good or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.

Source: World Bank Database
Imports in Brazil increased to 312.62 USD Billion (the highest record) in 2011 from 83.29 USD Billion in 2004. Historically, from 1959 until 2013, Brazil Imports reached a record low of 67 USD Million in March of 1965. Brazil main imports are: raw materials and intermediate goods(45%), capital goods(22%), consumption durables(10%), oil(6 %) and motor vehicles(4%). Source: SECEX/MDIC
Comparing to other countries from South America, Brazil is ranked second with average imports of 180 US$ Billion, after Mexico (average 292 US$ Billion) and is followed by Argentina Chile and Colombia with an average around 50 US$ Billion. Since 2012 is ranked 22nd in the world, and is surpassed by Mexico (15th). You can observe those differences in the graph Relative value of imports” from the Appendix.

The Major Import Partners
Main import partners are: the European Union Member States (10.6%, United States (7.8%), China (7.5%), Argentina (3.9%) and South Korea (2.3%). Others include: Netherlands, Japan, Germany and India. Brazil accounts for 2.1% out of the total imports made by the EU.

Source: IMF (DoTS)
Exports measure the amount of goods or services that domestic producers provide to foreign consumers by. It is a good that is sent to another country for sale. In the past, export of commercial quantities of goods normally required involvement of the customs authorities in both the country of export and the country of import. More recently, with the advent of small trades over the internet such as through Amazon and e-Bay, exports have largely bypassed the involvement of Customs in many countries due to the low individual values of these trades. Nonetheless, these small exports are subject to legal restrictions applied by the country of export.

Source: World Bank Database
Exports in Brazil increased to 294.45 USD Billion in April of 2013 from 19320.43 USD Million in March of 2013. Historically, exports in Brazil are reported by the Ministério do Desenvolvimento, Indústria e Comércio Exterior from 1954 and reached all time high of 294.45 USD Billion in August 2011 and a record low of 75.06 USD Million in January 1965. Brazil has an export-oriented economy and the increasing trend in exports continues also after 2011.
Brazil is the world´s largest exporter of soybean (41 % of world´s exports) and of orange juice (55% of world´s exports) and accounts for 35% of global exports of raw cane and refined sugar. Other exports: iron ore and concentrates (13%), oil (8%), raw sugar (4%) and coffee (2.4 %).
Source: SECEX/MDIC
In comparison with other countries from South America, Brazil is ranked second regarding exports with an average of 289.1 US$ Billion during the 2004-2011 period, and is surpassed by Mexico with an average in exports of 277.22 US$ Billion over the same period. Argentina, Chile and Colombia exports value around 56.86 US$ Billion in average. Brazil is ranked 25th country in the world when it comes to exports, while Mexico is ranked 16th. You can observe those differences in the graph Relative value of exports” from the Appendix.
Exports per capita
The exports per capita follow an ascending trend, reaching a low point in 2009 and reaching to USD 1495 in 2011. In 2010 Brazil was ranked 117th country in the world by exports per capita.
Source: http://kushnirs.org/
The Major Export Partners
Main export partners are: the European Union Member States (10.4%, China (8.7%), United States (5.1%), Argentina (4.5%) and Japan (1.9%). Other countries include: Argentina, Netherlands, Japan, Germany and India. Brazil accounts for 2.3 % out of the total exports made by the EU.

Source: IMF (DoTS)
After separately analyzing the imports and exports of the country, we can compute the Balance of Trade over the 2007-2012 period in Brazil, from where we can observe that imports increased at a higher rate comparing to exports, reaching a trade deficit in 2012 of -2.6 USD Billion. A Balance of Trade graph is attached in the Appendix.
Terms of trade
Terms of Trade (ToT) refers to the ratio of Price of exportable goods to the Price of importable goods. If a country terms of trade is more than 100%, it means that the country exports is more than it imports and that capital is coming in. If a country’s ToT) is less than 100%, then there is more capital going out the country needs to buy more products outside. The terms of trade ratio is heavily influenced by changes in the exchange rate because a rise in the value of a country domestic currency decreases prices for its imports but also makes exports less competitive.

Source: www.tradingeconomics.com
Terms of Trade in Brazil averaged 93.63 Index Points reaching an all time high of 132.64 Index Points in September of 2011 and a record low of 64.71 Index Points in October of 1981. In Brazil, ToT correspond to the ratio of Price of exportable goods to the Price of importable goods.
Capital Flows
Capital Flows refer to the capital account and the financial account of a country’s balance of payments. Transactions included in those accounts are simply the transfer of ownership of assets from residents of one country to residents of another. In detail, the Capital account records transfers of goods and financial assets by migrants leaving or entering a country and transfers of non-financial non-produced goods such as gift and inheritance taxes, patents, copyrights, royalties. The Financial account records transactions on government-owned assets, foreign direct investments, global monetary flows related to investment in business, real estate, bonds and stocks, private sector assets held in other countries and local assets held by foreigners.

Source: Banco Central do Brasil
Capital Flows in Brazil reached his peak by increasing to 13.38 USD Billion in 2011 from -4.78 USD Billion in 2008. Historically, the Capital Flows which are reported by the Banco Central Do Brasil from 1995, reached a record low of -16.64 USD Billion in 1998. The international capital flows are measured using the Capital and Financial Account Balance of the BoP.
External debt

Source: CIA World Factbook
External Debt in Brazil increased to 310.8 USD Billion in 2011 from 176.5 USD Billion in 2007. Historically, External Debt in Brazil is reported by the Banco Central Do Brasil from 1980, Brazil and reached record low of 64.26 USD Billion in December of 1980. In Brazil, external debt is a part of the total debt that is owed to creditors outside the country. The upward trend continue also after 2011.Brazil is ranked 26th country in the world as of 2012, according to the Central Intelligence Agency, with a debt of 405.3 USD Billion.

Conclusions
As we anticipated Brazil has a great potential in terms of labor force available, and is already on its way to securing it place as a word power.
The so called Brazil Cost implies additional costs to most businesses producing goods and services in Brazil more expensive then ones produced in other emerging countries.
Also to be taken in account is the particularly long time period necessary for setting up a business which is on average of 120 days, 4 times longer than in other competitor emerging states. Frontier Strategy details how it costs double a person’s salary to hire someone in Brazil because of taxes and welfare payments.
A lot of the deficits in infrastructure will be remedied with the upcoming World Cup and Olympic Games. And more reforms have been announced by the Brazilian President, reducing corruption being the next milestone.
Brazil is a high-growth market in terms of opportunities for revenue expansion but it is on average a low-margin market in terms of profitability, particularly for companies in the start-up phase.
Although the barriers to entry are higher, the business environment is favorable for a large array of businesses which can support higher start-up costs.

Appendix
Appendix 1: Geographical positioning

Appendix 2: Administrative districts

Appendix 3: Population distribution by age groups and sex

Appendix 4: Population density: ranging from green - the most populated states to red - the most uninhabited states

Appendix 5:
“For managers of multinationals in the booming economy, particularly those arriving fresh off the boat with a spreadsheet full of profit targets copied and pasted from the business plans of their peers in India and China, the country’s high-cost base is the first thing that will hit them. Whether it is that credit-card bill after a night out in Rio de Janeiro or the first hard look at the company wage bill in the office, the new manager will soon have to confront what is called Custo Brasil – the Brazil cost.”
Appendix 6: President Dilma Rousseff cited by Merco Press
“Brazil has an unnecessary cost with its ports. We have to open up to competition because the ports are part of the so-called Brazil Cost”
“Our country has to change, and change in the direction of greater competitiveness”
Appendix 7:

Appendix 8:

Appendix 9:

Appendix 10:

Appendix 11:

Appendix 12:

Appendix 13:

Appendix 14:

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[ 1 ]. Further referred to as Brazil, in this report
[ 2 ]. http://www.bloomberg.com/quote/USDBRL:CUR on May the 15th 2013
[ 3 ]. http://en.wikipedia.org/wiki/Brazil
[ 4 ]. http://en.wikipedia.org/wiki/Brazil
[ 5 ]. http://web.mit.edu/12.000/www/m2006/teams/willr3/const.htm
[ 6 ]. http://www.oecd.org http://www.bti-project.de https://www.cia.gov
[ 7 ]. http://www.forbes.com
[ 8 ]. http://data.worldbank.org
[ 9 ]. http://www.heritage.org
[ 10 ]. http://www.tradingeconomics.com
[ 11 ]. http://www.ft.com
[ 12 ]. http://en.mercopress.com