Gestão Hoje - a newsletter da TGI

Number 752 – 13 July 2009

Neither Belindia nor Banglalbania,
Brazil after the Real is closer to Enghana

After the 1988 Constitution and the Real Plan in 1994, Brazil no longer resembles a mix of Belgium and India; it is much closer to a mixture of England and Ghana

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In 1974, the economist Edmar Bacha wrote a fable that popularized the term “Belindia� to define the distribution of wealth in Brazil at the time: part Belgium (small and rich) and part India (large and poor).  At the pyramid’s top, a small part of the population (classes A and B) and at the base, the vast majority, poor and devoid of resources.

“At the time, such a narrative was used to criticize the military regime’s economic policy of wealth concentration.”

Época Negócios, 06.05.09

25 years later, in an interview  in Folha de S. Paulo about the 15th anniversary of the Real plan, Edmar Bacha, considered one of its “fathers�, corrects his former definition of the country, taking into consideration the plan’s success and the changes Brazil has gone through over the last few years.

“Inequality is still a strong trait, but the combination of stable growth and social policies has improved the “Indiaâ€? part of Brazil. Under such circumstances it is no longer correct to talk of Belindia anymore. Maybe the compound name proposed by Delfim Netto is more appropriate nowadays: Enghana – England’s taxes and Ghana’s public services. Anyway, at least we were able to avoid Banglalbania – Bangladesh and Albania –, so feared by Mario Henrique Simonsen.”

Edmar Bacha, Folha de S. Paulo, 01.07.09

The expression “Enghana� was coined by the economist and former minister of the Treasury, Agriculture and Planning, Antonio Delfim Netto, especially to characterize the new Brazilian post-stability, with a developed country’s tax burden and underdeveloped country’s public services, which is the case in Ghana. In relation to the tax burden, last week a new record (36% of the GDP) for 2008 was officially published.

“The tax burden, which for 30 years had varied around 25% of the national income, has skyrocketed to levels that exist only in communist or social-democratic countries.”

Gustavo Patu, Folha de S. Paulo, 08.07.09

Two factors have contributed to the increase of about 10 percent over the past years: one, the obligations generated by the 1988 constitution that drafted a distributive State and, second, the macroeconomic stability that has transformed chronic inflation into debt, which requires a large number of resources to continue financing it; and what’s worse, the revenues come mostly from indirect taxes, which penalizes, very much so, the poor.

“Instead of prioritizing direct and income-based taxing, following the example of social-democratic countries, Brazil has opted for concentrating revenues through indirect taxes, which weighs more heavily on the shoulders of the poorer population.”

Gustavo Patu, Folha de S. Paulo, 08.07.09

This is a new characteristic of the country Edmar Bacha says is no longer Belindia and Delfim Netto calls Enghana: it has made great social improvements but has also increased the tax burden, especially on the poor, besides maintaining the quality of its public services at very precarious levels. But, this is something to be discussed in another GH.

Number 751 – 8 July 2009

The Real’s 15th anniversary:
a plan that ended Brazil being a world joke

Brazil’s inconvenient role as a bad taste international economic joke with an inflation rate of 10,500,000,000,000% in 14 years has changed dramatically after the success of the Real Plan

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On July 1, 1994 Fernando Henrique Cardoso, then Minister of the Treasury under President Itamar Franco, released the Real Plan, the tenth currency in Brazilian history and fifth after the Cruzado Plan, released in 1986. 15 years ago was thus the beginning of the fifth and last “unorthodox� plan to control inflation, an economic plague that had been attacking the country for decades and ridiculing Brazil in the face of the civilized world.

“Brazil has become an example in the specialized literature for having one of the most astounding cases of hyperinflation in history. Between January 1980 and June 2004, the cumulative inflation rate in the country, measured by the IPCA, was of 10,5% trillion (or 10,500,000,000,000%). The highest annual inflation rate ever recorded in the country was in 1994, when it reached 2,407%. The currency lost almost half of its purchasing power every month.”

Veja magazine, 08.07.09

Different from other countries that at that time also experienced inflationary tendencies, Brazil, and its unfailing national conciliatory spirit, created a mechanism called monetary correction, which was responsible for covering up the devastating effects of inflation for many years.

“… in Brazil we had the illusion that high inflation and growth could somehow coexist (…) Such an attitude led us to institutionalize indexation mechanisms (…) But the cost of such a policy was to anesthetize society concerning a problem that affected its wellbeing and postponed tackling it definitively. When Brazil came to its senses, (…) inflation had already reached destructive levels for the economy and moved towards deteriorating social peace.”

Luiz Carlos Mendonça de Barros, FSP, 03.06.09

For this reason, Brazil was the last country to put an end to hyperinflation and the results of such a delay were hard on the economy, especially for the poor that did not fully benefit from the monetary correction that shielded the income of those who had direct access to the banking system.

“Brazil was the last country to end slavery as well as the last to end hyperinflation; nothing to be proud of, especially if you keep in mind that inflation affected the poor more substantially. The Real made a break with the past and opened up a new path for the economic and social development of the country. (…) It brought a series of important structural changes onto the Brazilian political agenda in order to make Brazil fulfill its capacity for growth.”

Pérsio Arida, one of the “fathers� of the Real Plan, OESP, 01.07.09

Today, Brazil can celebrate its ability to cope with the crisis better than other countries, thanks to the success of the Real Plan. Fifteen years after the victory over inflation, we can highlight other results such as the great effort to balance fiscal funds, the fluctuating exchange rates, the inflation rate plan, an independent Central Bank and a strong currency. This was the base from which the Lula administration, wise enough to maintain whatever was showing positive results, could implement policies to improve the purchasing power of salaries, the Family Bursary and many other policies that have helped consolidate Brazil’s current position in the world.

Number 750 – 29 June 2009

Each senator costs R$ 33 million a
year and Brazil asks in disbelief: what for?

Confirming the thesis that the Brazilian Congress is a “fantasy island�, there has been a new wave of embarrassing accusations of crimes taking place in the administration division of the Senate

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Since the publication of GH/741 (“Congress seems to have isolated itself from society on a fantasy island�), the situation at the National Congress and, more specifically, at the Senate, has just worsened. Hidden agendas, illicit wealth accumulation, illegal favoring, secret offices and many other irregularities have been discovered and treated as if they were in no way connected to the current president of the institution and former president of Brazil, Senator Jose Sarney. He even delivered a pathetic address to other senate members as well as other public declarations exempting himself from any guilt.

“I thought that being elected president meant to preside over the political issues within the Senate and not to be looking for secret closets and cleaning out the trash in the Senate’s kitchen.”

José Sarney, President of the Senate, 22.06.09

Even President Lula defended his political ally and proposed the creation of a category of people that can be absolved from any mistake due to their “history�.

“Sarney has enough of a history and is not to be treated as a common person.”

Luiz Inácio Lula da Silva, President of Brazil

All this reveals such a degree of deterioration that the unavoidable reality of the dissociation between the political class and Brazilian society as a whole has become increasingly evident, as shown in GH/741. The editorial of this week’s issue of Veja magazine states that Brazil is now “a country much better that its own politicians�.

“Aside from politics, Brazil has been teaching the world lessons on resilience, organization, discipline and boldness. Brazilian victories are always highlighted abroad. Last week, Barack Obama, president of the US, referred to Brazil’s role as a civilizing agent in South America and to its impeccable management of the national economy.”

Editorial, Veja magazine, 01.07.09

In fact, this is a deep contradiction. Brazil’s newfound international status, especially after the financial crisis that has turned into a world recession (see  GH/738), does not square with a backward political class that is completely out of touch with the country’s real needs. Such a situation causes perplexity and exposes absurdities such as the Brazilian Senate being one of the most expensive in the world.

“The Senate has one of the country’s most expensive budgets. In 2008, it spent R$ 2.7 billion of public money – that is to say, of Brazilian taxpayers’ money. (…) Considering that such an enormous amount is spent to justify the work of 81 senators, each “Excellencyâ€? costs the taxpayer R$ 33 million a year.”

IstoÉ magazine, 01.07.09

It’s hard to disagree that this really is a “fantasy island� far removed from the needs of Brazilian society; a form of dissociation between the political class and the country. We hope there will be some improvements after the latest mess has been cleaned up.

Number 749 – 22nd June 2009

The importance of maintaining focus
for a more efficient use of personal time

How Pareto’s Principle (20% of causes are responsible for 80% of the consequences) can be used as a reference for focusing on our personal prioritie

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The relationship between intense work, success, free time, rest and leisure has been increasingly discussed in the specialized literature. Not long ago, Gestão Hoje commented on two recently published books on success and work that (see GH 476). There have also been articles on slowing down and resting in GH 569 and GH 572. One of the questions in need of further clarification is the importance of focusing in order to avoid wasting time and attention. For this reason, it’s worth commenting on another book called “The 80/20 Principle: The Secret to Success by Achieving More with Less� by Richard Koch (Doubleday).  The main idea of the book is:

“20% of any causes we can measure – such as people, natural forces, economic data – usually lead to about 80% of the results, consequences or effects.”

Richard Koch

In all truth, this is no more than the application of Pareto’s Principle, proposed in 1897 by the Italian economist Vilfredo Pareto (1848-1943) after his study of wealth distribution in the UK , in which he discovered that most of the wealth (80%) was concentrated in the hands of a minority of the population (20%). During the first half of the last century, the principle was revisited and applied to the entrepreneurial field by the Romanian naturalized American engineer and statistician Joseph Juran (1904-2008), regarded as one of the founding fathers (together with W. Edwards Deming) of the Theory of Total Quality. Richard Koch, a defender of the universality of the principle, exemplifies:

“(…) 80% of all books sold are by 20% of authors; (…) more than 80% of all scientific discoveries are made by 20% of the scientists; (…) less than 20% of the clouds will produce 80% of all the rain around the world; (…) more than 80% of the world’s food is grown on less than 20% of the earth (…).”

Richard Koch

Koch expands the principle to encompass our everyday reality, as well as the use we make of our time every day.

“There are two ways of understanding time. There is a small amount of time (20% or less) that provides us with 80% of what we desire. There is a much bigger amount of time (80% or more) that answers for only 20% of what we wish to achieve.”

Richard Koch

In order to take advantage of such a principle, Koch recommends ‘focus’ as a way of doing more with less.

“Focus is the secret of power, happiness, and personal success. Being focused makes you do less. Focusing allows you to transform less into more.”

Richard Koch

Besides that, he also recommends focusing more on personal strengths than weaknesses. It’s worth paying attention to what he has to say, even if you have to push aside the issues of a book with self-help inclinations.

“Successful people have many strengths – as well as a considerable number of weaknesses. (…) The secret for extraordinary results is to focus on qualities and their evolution until they reach Olympic standards.”

Richard Koch

Number 748 – 15th June 2009

Brazil is the “most delicious stuffed turkey
on the market�

Although Brazil is technically in recession and still has the world’s third highest interest rate, it’s starting to recover the dollars lost recently, while keeping the Real strong

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The same week the Brazilian economy was officially announced to have entered recession (two consecutive quarters with negative growth), when IBGE published an 0.8% decrease in the first quarter’s GDP, the Central Bank reduced the Selic (base interest) rate to 9.25%. This is the first time the rate has fallen below 10% since the creation of the Monetary Policy Committee (Copom).

“For the first time since the Plano Real, the base rate has dropped to a single figure. This is the lowest credit cost in the history of a country where it was once necessary to pay more than 400.000% a year to take out a bank loan or finance the purchase of industrial equipment.”

Exame, 11.06.09

This truly historical feat is due to Brazil’s macroeconomic stabilization, which followed the implementation of Plano Real, fifteen years ago. However, because of the high costs of such stabilization, although Brazil now has its lowest ever interest rate, it’s still one of the highest in the world.

“Brazil has one of the highest interest rates in the world (not considering inflation). (…) the country has interest rates of 4.9%, standing just behind China (6.9%) and Hungary (5.9%).”

Folha de S. Paulo, 11.06.09

In addition to the international perception that Brazil is one of the countries coping with the crisis more successfully – and will probably come out of it faster – the low interest rate has been motivating foreign investors to bring back the dollars taken out of the country during the worst stage of the crisis. Bovespa has already registered an increase of over 40% in trading; the price of the dollar has also decreased by 16% in 2009.

“The Real’s increasing value has once again transformed the Brazilian economy into the most delicious stuffed turkey available on the world market. For the last five months, Bovespa’s net return in dollars has been around 7% per month; practically 125% per year, against the minus 1% and 4%, respectively, from the two- and ten-year US Treasury Bonds.”

Delfim Netto, economist, Folha de S. Paulo, 10.06.09

The stronger currency has resulted from a combination of the dollar’s excess liquidity in the US, its even higher interest rates and the low prices of Brazilian companies’ shares. Even though this is bad for the Brazilian economy in terms of exportation, it is unfailing proof of Brazil’s post-crisis strength, despite the recession.

“It’s like making a structural analysis after a hurricane and discovering that almost everything is still standing. The crisis has been an essential challenge for the institutional and macroeconomic forces in our country. Brazil has passed the test.”

Paulo Leme, Goldman Sachs Director, Veja, 17.06.09

Now we only need to finish doing our homework and try to avoid an excessive increase in the Real’s value; also, to keep an eye on the developed countries’ recovery, which, as far as we can see, will be slower than expected. If Brazil knows how to avoid excesses, it will emerge from the crisis, paradoxically, stronger than before: one more contradiction for this country full of contrasts.

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