Transcript BRAZIL 2015: A REFORM AGENDA Armando Castelar Pinheiro

BRAZIL 2015: A REFORM AGENDA
Armando Castelar Pinheiro
(based on joint work with Fabio Giambiagi)
Seminar at the Inter American Development Bank
Washington, October 4, 2005
Outline
• First- and second-generation reforms
• Why did reforms fail to spur higher growth?
• A new agenda of reforms
– Macro
– Structural
– Institutional
Growth: the main motivation for reforms
Period
GDP
growth
Contributions to GDP growth of (a)
A=B+C+D
Capital
Total Factor
Labor (C)
(B)
Productivity (D)
1931-45
4.3
1.7
1.0
1.7
1946-80
7.4
4.6
1.4
1.4
1981-93
1.6
1.3
1.1
-0.7
Change from
1946-80 to 1981-93
- 5.8
- 3.3
- 0.3
- 2.1
Source: Armando Castelar Pinheiro, “Is Institutional Reform the Key to Brazil’s
Accelerated Development?”, 2003, mimeo.
The 1990s reforms
• Explanations for growth deceleration
– Very high inflation
– Semi-autarkic economy
– State’s inability to invest in infrastructure due
to fiscal crisis
• Goal:
– Resume growth by attracting private investment
and fostering TFP growth through increased
competition, private ownership and constraints
on policy discretion.
-5
Source: IBGE.
2004 12
2003 11
2002 10
2001 09
2000 08
1999 07
1998 06
1997 05
1996 04
1995 03
1994 02
1993 01
1991 12
1990 11
1989 10
1988 09
1987 08
1986 07
1985 06
1984 05
1983 04
1982 03
1981 02
1980 01
Inflation was brought under control
Monthly consumer price inflation (IPCA, %)
85
75
65
55
45
35
25
15
5
Comparative Indices of Structural Reform
Overall
Trade Financial Tax Privatization Labor
index
1985
0.26
0.08
0.30
0.18
0.00
0.75
1999
0.61
0.84
0.50
0.52
0.50
0.70
Regional 1985
average 1999
0.34
0.52
0.26
0.33
0.00
0.59
0.58
0.89
0.70
0.48
0.26
0.60
1985
0.49
0.77
0.54
0.44
0.00
0.69
1999
0.61
0.95
0.73
0.51
0.16
0.68
Brazil
Chile
Source: Eduardo Lora, 2001; “Structural Reforms in Latin America: What Has Been Reformed
and How to Measure it” Working Paper 466, Inter-American Development Bank.
Reforms failed to bring high growth back
GDP
growth
Period
A=B+C+D
Contributions to GDP growth of (a)
Capital
Total Factor
Labor (C)
(B)
Productivity (D)
1.7
1.0
1.7
1931-45
4.3
1946-80
7.4
4.6
1.4
1.4
1981-93
1.6
1.3
1.1
-0.7
1994-04 (b)
2.7
1.0
0.6
1.1
1946-80 to 1981-93
- 5.8
- 3.3
- 0.3
- 2.1
1981-93 to 1994-04
1.1
- 0.3
- 0.5
1.8
Change from
Source: Armando Castelar Pinheiro, “Is Institutional Reform the Key to Brazil’s
Accelerated Development?”, 2003, mimeo.
GDP growth outlook (%)
2003 2004 2005 2006
World
4.0
5.1
4.3
4.3
Developing economies
6.5
7.3
6.4
6.1
Western Hemisphere
2.2
5.6
4.1
3.8
Brazil
0.5
4.9
3.3
3.5
Source: IMF.
Economia
GDP growth: Median market forecasts (%)
4,9
3,5
3,5
2006
2007
3,7
3,3
3,5
1,9
1,3
0,5
2001
2002
2003
Source: Central Bank.
2004
2005
2008
2009
Why did reforms fail to spur rapid growth?
• Washington Consensus – Lack of depth
• Augmented Washington Consensus – Lack of
breadth
• Error in adopting universal policy agendas:
insufficient customization (focus, sequencing
and institutional arrangements)
• Too much market, too little state intervention
Insufficient depth
• Government continues to get in the
market’s way
 Large
public deficit and debt
 High
rates of interest
 Low
integration into world economy
 High
taxes
Sources: Central Bank and IBGE.
jun/05
dez/04
jun/04
dez/03
jun/03
dez/02
jun/02
dez/01
dez/00
jun/01
jun/00
jun/99
dez/99
dez/98
jun/98
dez/97
jun/97
dez/96
jun/96
dez/95
jun/95
Real interest rates on public bonds (%, p.a.)
30
25
20
15
10
5
0
0
Source: World Bank, WDI 2005.
Japan
Venezuela, RB
Peru
Pakistan
Russian Federation
Norway
40
Algeria
Niger
Madagascar
Guinea
Spain
Afghanistan
Kuwait
Georgia
Denmark
Canada
Korea, Rep.
Albania
Angola
Oman
Côte d'Ivoire
Zambia
Senegal
Lebanon
Turkmenistan
Malawi
Costa Rica
Mauritania
Gambia, The
Macedonia, FYR
United Arab Emirates
Bulgaria
Jordan
Vietnam
Moldova
Eritrea
Hong Kong, China
Imports / GDP (%, 2003)
160
140
120
100
80
60
Brazil 10.3%
20
Augmented Washington Consensus
• Market failures reflect weak or missing
institutions
 Washington
Consensus
necessary but insufficient.
policies
 Goods
institutions are necessary
improve incentives and reduce risk.
 AWC
= WC + institutional reforms.
are
to
Institutional reforms
• New competition law and agencies
• Regulatory reform and independent
regulatory agencies in infrastructure and
capital markets
• Stronger creditor rights (bankruptcy law)
• Judicial reform
• Public sector reform
• Business and labor regulation reform
Insufficient breadth
• Regulation of infrastructure: problems of sequencing
and sectors with incomplete (electricity) or missing
regulation (sanitation)
• Competition and regulatory agencies lack sufficient
autonomy
• Financial sector: new bankruptcy law, but no change
in collateral and procedure codes
• Judicial reform: little yet implemented
• Barely anything done to improve labor and business
regulation
Country-specific agendas
“The only constant in development is systemic
dynamic change. This would hardly be worth
stating, were it not that development theory has
been presented as if its propositions are
universally applicable, no matter what single
feature of development policy they choose to
stress and no matter which country its
recommendation address. As a result,
development policy advice has rarely been
specifically tailored to the country’s initial
conditions, widely interpreted”.
Irma Adelman, Fifty years of economic development: What have we learned?, ABCDE Conference,
World Bank, 2000.
Universal Laws
•
•
•
•
Macroeconomic discipline
Rule of law
Good policies
Right prices and incentives
Focus, sequencing and institutional
arrangements should be countryspecific
The role of the state
• Problems

Fiscal crisis and liberal reforms (as well as
democracy?) reduced the state’s ability to foster
and direct investment

Inadequate balance between carrots and sticks
(Latin America vs. East Asia)
• Promote state role in leading economic
development

State should pick winners and support losers

Greater scope for industrial / investment policies
Growth of GDP and capital stock
(% p.a., 5-year moving avg)
14
Capital
12
10
9,0%
8
6
3,8%
3,8%
4
2
GDP
1,8%
PIB
Capital
média 1935-45
média 1946-80
média 1981-93
média 1994-2004
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
1950
1947
1944
1941
1938
-2
1935
0
Brazil: Savings and Investment: 1947-2004
28%
26%
24%
22%
20%
18%
16%
14%
Gross capital formation
Gross National Savings
12%
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
10%
Savings breakdown (% of GDP)
30
25
20
15
10
5
0
-5
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-10
Public
Private
Foreign
Source: Fabio Giambiagi and Fernando Montero, 2005; "O Ajuste da Poupança Doméstica No Brasil: 1999/2004”.
Improving investment climate
Structural and
institutional
reforms
Increase
competition
Raise
efficiency
Lower risk
Low
costs
Better risk
x return
Lower taxes
and cost of
capital
Macro
adjustment
Greater
demand
and output
More
investment
Quality of public
spending
A reform agenda
• Fiscal policy trilema
• Trade liberalization
• Financial sector reform
• Informality: tax, labor and business regulation
• Jurisdictional risk
Fiscal policy trilema
Reduce public
debt/GDP
Lower
taxes
Increase public
investment
Public and SOE investment (% of GDP)
12
Decline in public
investment lowered
annual GDP growth by
0.4 p.p.*
10
8
6
4
2
Public sector
Federal SOEs
State & Munic SOEs
(*) Pedro C. Ferreira and Leandro Nascimento, “Welfare and growth effects of alternative fiscal rules in Brazil”,
EPGE/FGV, 2005.
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
0
Gross tax burden (% of GDP)
40
35
30
25
20
Rise in tax burden lowered
annual GDP growth by 1.5 p.p.*
15
10
5
(*) Pedro C. Ferreira and Leandro Nascimento, “Welfare and growth effects of alternative fiscal rules in Brazil”,
EPGE/FGV, 2005.
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
0
Brazil’s tax burden: out of line with international
standards
Suécia
50%
França
45%
Israel
Holanda
Canadá
Tax burden % of GDP
40%
Alemanha
Polônia
Portugal
35%
Reino Unido
Espanha
Austrália
África do Sul
30%
Austria
Itália
Hungria
Brasil
Dinamarca
EUA
25%
Bolívia
Chile
Japão
Argentina
20%
Singapura
Coréia do Sul
México
15%
Venezuela
10%
0
2500
5000
Source: Khair (2003)
7500
10000 12500
15000 17500 20000
Per Capita GDP (US$)
22500 25000
27500
30000 32500
35000
50
20
Jan-91
Jul-91
Jan-92
Jul-92
Jan-93
Jul-93
Jan-94
Jul-94
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Public debt and interest payments (% of GDP)
70
6
60
5
Public debt
4
40
3
30
2
Interest
payments
1
10
0
0
-1
Net Public debt (% of GDP) vs. per capita GDP
(PPP) in 2002
110
Japão
70
Dívida pública líquida (%PIB)
50
Bélgica
Itália
90
Brasil
Alemanha
Estados Unidos
Espanha
30
Nova Zelândia
10
França
Reino
Unido
Suéci
Áustria
Canadá
Países Baixos
Austrália
Dinamarca
-10
-30
Coréia
Finlândia
-50
-70
Noruega
-90
5000
10000
15000
20000
25000
PIB per CAPITA (PPP)
FONTES: Banco Mundial, OECD e Banco Central.
30000
35000
40000
Fiscal reform
• Reduce public debt / GDP ratio:
– Sustain a high primary surplus
– Lower the cost of debt
• Restructure public spending to
accommodate rise in public sector
investment
• Reduce tax burden
– Social security reform
• Develop a medium-term fiscal framework
that lowers political risk
Fiscal accounts: Lower public debt / GDP
2004
2010
2015
Central government
Reveneues (*)
Primary expenditures (*)
Primary surplus of central
government
20.5
17.8
20.1
17.6
19.1
17.8
2.7
2.5
1.3
Total primary surplus
Nominal interest payments
4.6
7.6
3.5
3.5
2.1
2.1
3.0
53.0
0.0
38.7
0.0
27.6
Public sector borrowing requirements
Net public debt
(*) Net of transfers to states and municipalities
Allow for a rise in public investment
Primary expenditures (*)
Personnel
Social security (INSS)
Other expenditures (OCC)
Primary surplus of central government
Primary surplus of states and
municipalities
Primary surplus of state enterprises
Gross tax burden
(*) Net of transfers to states and municipalities
2004
17.8
4.9
7.1
5.8
2.7
2010
17.6
4.2
7.2
6.2
2.5
2015
17.8
3.9
7.2
6.7
1.3
1.0
1.0
0.8
0.9
0.1
0
35.5
35.1
34.1
Breakdown of Public Federal Expenditures
(net of transfers to states and municipalities, % of GDP)
14
12
10
2.4
8
2.4
2.4
6
2.0
4
0.9
5.8
4.9
2
7.2
6.5
3.4
0
1991
1994
Private sector social security
1998
Retired
2002
2004
Personnel (active)
Social security
0
Other social spending
Korea
Mexico
Ireland
United States
Japan
Slovak Republic
Australia
Canada
Brasil
Spain
New Zealand
Czech Republic
Hungary
Netherlands
United Kingdom
Portugal
Greece
Poland
Italy
Norway
Finland
Austria
Germany
Switzerland
Belgium
France
Sweden
Denmark
Size and composition of public social
expenditures
40
35
30
25
20
15
10
5
Social security expenditures versus % population
over 65
Social security expenditures (%GDP)
18
16
Suiça
Polônia
14
Itália
Austria
França
12
Brasil
10
Holanda
Espanha
Reino
Unido
Eslováquia
8
México
Nova
Zelândia
6
EUA/Austrália
Canadá
Irlanda
4
2
Japão
Coréia
0
4
6
8
10
12
% population > 65
Sources: OECD, MoF/Brazil and World Bank.
14
16
18
20
Grauof
de poverty
pobreza ao longo
do ciclolife
de vida
Rate
through
cycle
60
Porcentagem de pobres
50
40
30
20
10
0
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
Idade
Age
Source: Ricardo Paes de Barros, “O impacto de aumentos reais no salário mínimo sobre o grau de
pobreza no Brasil”, apresentação no Congresso Nacional, Brasília, Dezembro 2004.
80
85
Social security reform
• Minimum (sliding) retirement age for private
sector
• Elimination of differences in eligibility
requirements for men and women
• End of privileged retirement rules for teachers
• De-linking social security benefits from
changes in minimum wage
Scenarios for social security and assistance
expenditures (% of GDP)
Year
Scenarios
C
D
3,0
4,0
Per
0,0
capita
GDP
A
3,0
Per
capita
GDP
B
3,0
E
4,0
F
4,0
0,0
0,0
No
No
Yes
No
No
Yes
2004
7,8
7,8
7,8
7,8
7,8
7,8
2009
7,9
7,8
7,8
7,7
7,5
7,5
2010
8,0
7,8
7,8
7,7
7,5
7,4
2020
8,7
8,3
7,2
7,8
7,3
6,3
2030
10,0
9,2
6,9
8,4
7,4
5,6
GDP growth (%)
Change in minimum
benefit (%)
Reform
0,0
Source: Giambiagi, Fabio; Mendonça, João Luis; Beltrão, Kaizô e Ardeo, Vagner; ”Diagnóstico da
Previdência Social no Brasil: o que foi feito e o que falta reformar?”; Pesquisa e Planejamento
Econômico, IPEA, dez 2004.
Trade liberalization
•
•
•
•
Macro reasoning
Raise exports
Lower exchange rate
and interest rate risk
Increase power of
monetary policy’s
exchange rate channel
Lower cost of capital
goods
•
•
•
•
Micro reasoning
Greater competition in
oligopolized sectors
Greater product
diversity
Access to modern
technology
Easier negotiations
with Mercosur
partners
Sovereign credit ratings and trade flows (2002)
(X+M)/PIB
100
Malásia
Rating = 0.275+ 0.986 * (X+M) /PIB R2 = 0.42
(0.875) (0.175)
81
Hungria
62
Coréia do Sul
43
México
Tailándia
Polônia
Chile
24
Filipinas
Rússia
Argentina
China
Brasil
Índia
5
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
RATING
8.5
Credit ratings and ratio of external debt to
exports of goods and non-factor services (2002)
DEL / EXPORTAÇÕES
5.5
Argentina
5.0
Rating = 6.674 - 1.948 * DEL /X R2 = 0.95
(0.085)(0.070)
4.5
4.0
3.5
3.0
2.5
Brasil
2.0
1.5
Filipinas
1.0
Chile
México
0.5
Rússia
Polônia
Tailândia
0.0
Índia
Hungria
Coréia do Sul
Malásia
China
-0.5
-1.0
-1.5
-2.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
RATING
8.5
0
Singapore
Belgiuma
Belarus
Moldova
Netherlands
Mongolia
Slovenia
Ukraine
Libya
Mauritius
Trinidad and Tobago
Tunisia
Romania
Botswana
Malawi
Korea, Rep.
Switzerland
Gabon
Uzbekistan
Senegal
Paraguay
Haiti
Mali
South Africab
Russian Federation
Congo, Dem. Rep.
New Zealand
Spain
Uruguay
Guatemala
Cameroon
Tanzania
Bangladesh
Uganda
Burkina Faso
100
Central African Republic
Rwanda
(Exports + Imports)/GDP (%, 2003)
350
300
250
200
150
Brazil
50
Average nominal tariff (%, 2001-04)
30
Tarifa nominal média (%)
25
20
15
10
5
0
0
5000
10000
15000
20000
25000
PIB per capita (2004, $ PPP)
Source: World Bank, WDI 2005.
30000
35000
40000
Bureaucracy in foreign trade: Exports
Number of Number of
Documents Signatures
Time
(days)
OECD: High income
5
3
12
East Asia & Pacific
6
7
25
Latin Amer & Caribbean
7
7
30
Brazil
7
8
39
Chile
6
7
23
Korea
5
3
12
Source: World Bank, WDI 2005.
Bureaucracy in foreign trade: Imports
Number of
Documents
Number of
Signatures
Time (days)
OECD: High income
6
3
14
East Asia & Pacific
10
8
27
Latin Amer & Caribbean
10
11
37
Brazil
14
16
43
Chile
8
8
24
Korea
8
5
12
Source: World Bank, WDI 2005.
An Agenda for Trade Policy
• Cut tariffs, unilaterally if necessary
• Reduce discrepancy in protection and focus on
more concentrated sectors
• Overhaul import and export bureaucratic controls
• Strengthen supporting technological institutions
• Align domestic and foreign product specifications
and regulations
• Improve rail and port performance
• Support investment in distribution in export
markets
Financial sector: Reforms
• Price stabilization
• Greater openness to foreign financial
institutions
• Improved bank supervision and regulation
• Privatization of state banks
• New bankruptcy law and credit information
registries
Financial sector: outcomes
• Domestic credit is scarce, expensive and concentrated
on short maturities
• Pension funds, insurance companies and mutual funds
invest mostly in public bonds
• Stock markets are smaller and less liquid than in Asian
and industrialized countries
• Most firms and households finance themselves out of
retained surpluses
• Impact of financial sector on growth (and equity) well
below potential
0
Source: World Bank, WDI 2005.
Turkmenistan
Liberia
Sierra Leone
Central African Republic
Zambia
Tanzania
Venezuela, RB
Syrian Arab Republic
Rwanda
Papua New Guinea
Burkina Faso
Turkey
Jamaica
Mexico
Ecuador
Peru
Colombia
Ethiopia
Bangladesh
Costa Rica
Slovak Republic
Latvia
Oman
100
El Salvador
125
Uruguay
Croatia
Mauritius
Tunisia
Kuwait
Norway
Australia
Sweden
Ireland
South Africa
Hong Kong, China
United States
Domestic credit to private sector
(2003,% of GDP)
250
225
200
175
150
Brazil (34,6%)
75
50
25
0
-10
Source: World Bank, WDI 2005.
Netherlands
Korea, Rep.
Ireland
Nepal
Slovak Republic
Sweden
Chile
Mexico
Israel
Philippines
Lithuania
Lebanon
Slovenia
Yemen, Rep.
South Africa
Egypt, Arab Rep.
Oman
Azerbaijan
Indonesia
Nigeria
Bosnia and Herzegovina
Germany
Venezuela, RB
Trinidad and Tobago
Argentina
Nicaragua
Peru
Lesotho
Tanzania
Liberia
Mozambique
Gabon
Central African Republic
60
Kyrgyz Republic
Haiti
Malawi
Uruguay
Angola
Interest rate spreads (percentage points, 2003)
80
70
Brazil (45.1%)
50
40
30
20
10
Spread decomposition (%)
Total
Private
Banks
Public
Banks
0.2
0.3
0.3
Administrative Cost
Cost of reserve
requirements
Taxes
28.3
22.5
38.3
8.3
9.8
7.2
12.3
12.8
11.8
Losses with default
27.3
25.4
30.4
Bank net margin
23.5
29.4
12.0
Cost of deposit insurance
Source: Ana Costa and Márcio Nakane (2004), “Revisitando a metodologia de decomposição do spread bancário
no Brasil”, paper presented at the seminar Economia Bancária e Crédito, Banco Central do Brasil.
Financial sector diagnosis
 Incomplete macro adjustment raises interest rates,
market volatility and jurisdictional uncertainty
 State role in mobilizing and allocating savings
dampens the impact of financial intermediation on
capital productivity
 There is insufficient competition among financial
institutions
 High tax burden penalizes financial intermediation,
encourages companies not to go public, and
fosters fiddling with company accounts
 Information available to creditors and minority
shareholders is very poor
Informal firms: Services considered important
Management training
Self
employed
10
Technical assistance
5
9
Legal assistance
3
5
Accounting assistance
3
10
Support for commercialization
24
28
Professional training
39
42
Credit
55
58
Source: IBGE.
Employer
20
Informal firms: Bookkeeping (%)
Self
employed Employer
Does not keep records
57
21
Records by him/herself
36
35
Accountant keeps records
6
43
Other
0
1
Source: IBGE.
Financial sector diagnosis (cont.)
 Legal and judicial protection to creditors and
minority shareholders is weak
 Repossession of collateral is slow and uncertain
 Low protection against public and private
expropriation raises the preference for short-term
and liquid financial assets, discourages financial
intermediation and raises the cost of capital

Savers often either reinvest their savings or keep
them abroad in safer jurisdictions
An agenda for the financial sector
• Complete macroeconomic adjustment
• Reduce taxation on financial intermediation (and
overall)
• Foster competition among financial institutions:
– Improve quality of information, facilitate repossession of
collateral, give clear mandate to competition agencies
• Reform judicial procedures and educate judges
• Reduce role of the state in mobilizing and allocating
financial savings
Informality
• High tax burden
• Complexity of tax system
• Labor market regulation: excessive
employment protection and high social
contribution charges
• Too much bureaucracy in business
regulation
0
Slovenia
Kazakhstan
Estonia
Cambodia
Azerbaijan
Uzbekistan
Macedonia, FYR
Malaysia
Russian Federation
Czech Republic
Tajikistan
Bosnia and
Latvia
Croatia
India
Indonesia
Hungary
Philippines
Georgia
Eritrea
Slovak Republic
Kyrgyz Republic
Bulgaria
Nicaragua
Serbia and Montenegro
Armenia
Honduras
Bangladesh
Lithuania
China
Albania
Ecuador
Turkey
Ukraine
Algeria
Pakistan
Belarus
Uganda
Senegal
Romania
Moldova
Guatemala
Zambia
Poland
Kenya
Tanzania
Ethiopia
Brazil
Tax rates as a major investment constraint
90
80
70
60
50
40
30
20
10
Source: World Bank, WDI 2005.
Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate
Surveys who ranked tax rates as a major or very severe investment constraint.
Burdensome and complex tax system
Total tax payable
(% of gross profit)
Time to comply
(hours per year)
OECD Countries
46.1
192
Latin Amer & Caribbean
52.8
529
Brazil
147.9
2,600
Chile
46.7
432
Korea
29.6
290
Source: Doing Business 2006.
Note: Measures the effective tax that a medium size company must pay in the second year of
operation (except for labor taxes) as well as time spent to comply with tax requirements. The total
amount of taxes is the sum of all the different taxes payable after accounting for deductions and
exemptions. The taxes withheld but not paid by the company are not included.
0
Kazakhstan
Azerbaijan
Uzbekistan
Armenia
Tajikistan
Slovenia
Russian Federation
Czech Republic
Georgia
Latvia
Estonia
Kyrgyz Republic
Ethiopia
Macedonia, FYR
Eritrea
Moldova
Croatia
Ukraine
Cambodia
Nicaragua
Serbia and Montenegro
Albania
Hungary
Slovak Republic
Bulgaria
Romania
Lithuania
Turkey
Bosnia and Herzegovina
Belarus
Bangladesh
Uganda
Tanzania
Algeria
Ecuador
Honduras
Malaysia
Pakistan
Senegal
Guatemala
India
Zambia
China
Kenya
Philippines
Poland
Indonesia
Brazil
Labor regulation as a major investment
constraint
60
50
40
30
20
10
Source: World Bank, WDI 2005.
Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate
Surveys who ranked labor regulations as a major or severe constraint.
Labor market regulation
Brazil
Average by income
level
Low Medium High
Employment laws (contractual
flexibility, conditions of
employment and job security)
2.4
1.6
1.7
1.2
Industrial relations (freedom and
influence of unions, participation
in company management and
protection in strikes)
1.9
1.1
1.4
1.1
Social security (retirement,
sickness and unemployment
benefits)
1.7
1.1
1.8
2.2
Source: Juan BOTERO et al., “The Regulation of Labor”, NBER Working Paper No. 9756, 2003.
Average time spent on
(in calendar days)
Dealing with
licenses *
Latin America and
Caribbean
OECD countries
Starting a
business
206
63
150
19
Brazil
460
152
Chile
191
27
Korea
60
22
Source: Doing Business 2006.
(*) Procedures required for a business in the construction industry to build a standardized warehouse.
These include obtaining all necessary licenses and permits, completing all required notifications and
inspections and submitting the relevant documents to the authorities. Doing Business also records
procedures for obtaining utility connections, such as electricity, telephone, water and sewerage
Informal firms: Municipal or state license (%)
Yes
Self
Employer
employed
19
52
No
79
38
No answer
2
11
Source: IBGE.
Jurisdictional uncertainty
• The “risk of acts of the Prince changing the
value of contracts before or at the moment of
their execution”, which, as is the case with court
rulings, “manifests itself predominantly as an
anti-saver and anti-creditor bias”.
• Raises risk, shortens maturities, increases the
preference for liquid assets and encourages
savers to keep their wealth in safer jurisdictions
• Discourages investment in transaction specific
assets
Agenda to increase jurisdictional certainty
• Reduce policy uncertainty
• Complete regulatory reform in infrastructure
• Strengthen regulatory agencies in
infrastructure and financial markets
• Central Bank (formal) autonomy
• Reduce judicial activism
• Strengthen competition
0
Azerbaijan
Slovenia
Estonia
Kazakhstan
Czech Republic
India
Hungary
Malaysia
Tajikistan
Uzbekistan
Latvia
Uganda
Philippines
Senegal
Eritrea
Russian Federation
Tanzania
Armenia
China
Lithuania
Kyrgyz Republic
Croatia
Macedonia, FYR
Ethiopia
Cambodia
Pakistan
Bosnia and Herzegovina
Romania
Georgia
Slovak Republic
Bangladesh
Ukraine
Honduras
Serbia and Montenegro
Indonesia
Albania
Kenya
Turkey
Moldova
Zambia
Nicaragua
Belarus
Poland
Bulgaria
Ecuador
Guatemala
Peru
Brazil
Policy uncertainty as major investment
constraint
80
70
60
50
40
30
20
10
Source: World Bank, WDI 2005.
Note: Measures the share of senior managers interviewed in World Bank–sponsored Investment Climate
Surveys who ranked economic and regulatory policy uncertainty as a major or very severe
investment constraint
Summing up
 Low investment due to:
High cost of capital
Heavy taxation
Substitution of current for capital spending in
public sector
High macro and jurisdictional risk
 Structural and institutional reforms remain
incomplete
 New problems: higher taxes and weaker property
rights (judicial activism, crime etc.)
Summing up
 Macroeconomic adjustment remains critical
 Reforms are interconnected:
complementarities and synergies are important
(tax, judicial etc.)
 Politics matters
 Role of bureaucracies in fostering reform and
developing institutional framework
 Can a mid-term reform framework play the
coordination role expected from “leaders”?