idb - country strategy with brazil

8/22/2019 Idb - Country Strategy With Brazil

1/42

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

BRAZIL

COUNTRY PAPER

JULY 2000


2/42

EXPLANATORY NOTE

In addition to minor editorial changes, the following information has been added to this

final version of the country paper for Brazil:

additional information on the issues of gender, poverty reduction, the environment,civil society, tax reform, and Bank action for regional integration

a summary of the budgetary priorities for the Government of Brazil the link between the fiscal adjustment program and the Bank program the role of the private sector in the energy sector additional indicators to monitor achievement of the social sector and fiscal reform

objectives


3/42

CONTENTS

EXECUTIVE SUMMARY

I. CHALLENGES AND PROSPECTS .......................................................................................... 1

1. Main development challenges...................................................................................1The challenge of achieving faster, more equitable, sustainable growth.................. 3The challenge of public sector reform..................................................................... 4

The challenge to make Brazil more competitive..................................................... 5The challenge of inequities and poverty.................................................................. 6The challenge of integration .................................................................................... 8

2. The "Avana Brasil" Plan and the macroeconomic outlook ....................................8The government's Multiyear (2000-2003) "Avana Brasil" Plan ........................... 8Macroeconomic outlook ........................................................................................ 10

II. OBJECTIVES AND STRATEGY ........................................................................................... 11

1. Recent Bank activities ............................................................................................. 12a. The strategy pursued since 1996 ................................................................... 12b. The Bank's impact .........................................................................................12c. Recent loan approvals and current portfolio ................................................. 13

2. Action areas in the Bank's strategy .........................................................................15a. Modernization of the State ............................................................................16b Improving competitiveness and market access by lowering the


4/42

Page 1 of 2

EXECUTIVE SUMMARY

Background Official medium-range planning is a requirement in the BrazilianConstitution, to be built around four-year periods that start one yearafter a new administration takes office. Brazil's current governmentbegan its term in January 1999. This paper covers the same time spanas Brazil's multiyear plan for 2000-2003, which takes in the last three

years of the present administration and the first year of its successor.

Development

challenges

Brazil is facing five main challenges for socioeconomic advancement,around which an analysis and determination of strategy guidelineshave been structured:

reviving economic growth with social equity and respect forthe environment, preserving the stability achieved;

public sector reform, since key structural reforms must becompleted quickly if the fiscal deficit is to be pared;

improving competitiveness by substantially lowering theso-called `Brazil cost', modernizing the nation's productionapparatus, and supporting microenterprise and small business;


5/42

Page 2 of 2 Executive Summary

Strategy

components

In light of the new macroeconomic environment in Brazil since mid-1999 and the content of the 2000-2003 Multiyear Plan, the followingwill be the central focuses of the Bank's strategy:

Foster and deepen reform and modernization of the State at thefederal, state, and municipal level.

Support efforts to make Brazilian products more competitive andimprove their market access, helping in initiatives to lower the

`Brazil cost' and modernize the economy by strengthening thefinancial system, supporting microenterprise and the small andmid-sized business sector, rehabilitating basic infrastructure,promoting integration, and developing tourism.

Support efforts to reduce social inequities and poverty withpriority to the education and health sectors, including actions tomake social spending more efficient and decentralize social

services, building partnerships with the community and civilsociety.

Address environmental management and natural resourcesproblems, with an emphasis on protecting fragile ecosystems.

Lending

scenarios

In keeping with recent approval levels and with spending constraintsin Brazil associated with its adjustment process, a base lending


6/42

I. CHALLENGES AND PROSPECTS

1. Main development challenges

1.1 Three major shifts in Brazilian development policy have shaped the socioeconomicbackdrop for Bank operations in that country in recent years. The first was the 1990decision, as a national goal, to open up the economy, to help build modernproductive sectors that could compete successfully in global markets. To that end,Brazil lowered customs tariffs and did away with other forms of protectionism that

had underpinned industrial development for decades. In 1990 it signed the Treaty ofAsuncion creating MERCOSUR. A further aim of the modernization strategy wasto scale back hitherto heavy State involvement, mainly by way of a privatizationprogram and constitutional reforms to spur foreign investment.

1.2 The second change was the adoption of measures to curb inflation, which hadskyrocketed between 1990 and 1993 at an average annual rate of 2,470%. Thismove was essential to tackle the widening fiscal deficit that had been aggravated byautomatic wage, contract, exchange-rate and other price-indexing arrangements.Apart from rekindling inflationary expectations, these indexing mechanisms madefor suboptimal resource allocation and worsened poverty levels.

1.3 To address this set of problems, the government launched the Plano Real (RealPlan) in June 1994. This innovative stabilization program brought in emergencyfiscal measures, abolished most indexing mechanisms and, as its centerpiece,

d th it th l t th U S d ll Th k t f B il'


7/42

- 2 -

1.6 The picture worsened from 1998 onward as the Asian crisis deepened and Russiadeclared a moratorium on debt payments. The most serious development for Brazil

was a loss of investor confidence that triggered heavy outflows of capital and ahemorrhage of foreign reserves. An IMF standby arrangement signed in November1998 was not enough to halt the deterioration: in January 1999, the authoritiesdecided to let the exchange rate float.

1.7 The third fundamentalchange in Brazil'seconomic policy was the

adjustment of theexchange-rate system.The immediate result ofthe changeover was asteep devaluation. Theauthorities thus workedout a revisedarrangement with the

IMF in March 1999,with heftier targets forthe primary surplus:3.1% of GDP for 1999and 3.5% for 2001.

1.8 Brazil's economic performance in 1999 was stronger than had been forecast at thestart of the year It managed to stave off severe recession posting 0 8% growth in

BRAZIL: Trade balance (bars)

and effective real exchange rate index

(line)

-10

-5

0

5

10

15

20

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

US$billon

0

50

100

150

200

Effectivereal

exc

hange

rateindex

1990=100


8/42

- 3 -

transforming Brazil into a truly modern nation, more resistant to chronic inflation.The country's privatization program - one of the most sweeping of its kind

anywhere in the world - has been pivotal in this context, more than 120 publicenterprises having been sold off since 1991 in virtually every sector of theeconomy. It has helped modernize Brazilian industry and utility companies andmake them more competitive, and has provided much of the money needed to fundcurrent-account and budget deficits.

1.11 To sum up: these decisive shifts in development policy in recent years have hadenormous repercussions in the country and pose distinct challenges for the years

ahead. These are outlined in the following paragraphs.

1.12 The challenge of achievingfaster, more equitable,

sustainable growth. Evenwith the considerable gainsachieved in price stabilityand structural reforms, the

Brazilian economy haslanguished since the mid-1990s. Real GDP growthrates slipped from an annualaverage of 5% in 1993-1995to 3.1% in 1996-1997 toclose to zero in 1998-1999.

BRAZIL: GDP growth (%)

4.2

2.73.6

-0.12

0.8

-1

0

12

3

4

5

1995 1996 1997 1998 1999


9/42

- 4 -

have to reinforce its efforts to achieve the right kind of fiscal adjustment, since thepublic finances are still the leading contributor to macroeconomic imbalances.

1.16 The challenge of public sector reform. Revamping the public sector was one ofBrazil's central targets for the 1990s. Some moves in this area have already yieldedsignificant gains, two highlights being a late-1998 constitutional amendment thatushered in an overhaul of the federal social security system, and new programslaunched to strengthen and modernize federal and state government administrationand taxation areas. Thanks to these initiatives and stable prices, the public sectorborrowing requirement (nominal deficit) narrowed considerably, notably in 1995-

1996. However, the public finances worsened again in 1997, in part because ofheavier subnational government spending and the spillover from the Asian crisis.

1.17 The performance of the public finance accounts in 1999 was mixed. On the plusside, the public-sector primary surplus stood at 3.13% of GDP, overshooting theIMF target by R$913 million. On the minus side, increases in accrued interest wereheftier, to 13.14% of GDP, largely because of the devaluation of the real. Thispushed up the nominal deficit (primary surplus plus accrued interest) from 8.06% of

GDP in December 1998 to 10.01% in December 1999. This trend can be expectedto reverse quickly in 2000, when the initial impact of the devaluation has beenabsorbed.

1.18 Though the outlook is generally positive, the public finances are still Brazil's mostvulnerable area. The challenge will be to maintain and entrench the fiscaladjustments accomplished thus far, to restructure the public sector and improve itsefficiency The more immediate problem is the need for further social security


10/42

- 5 -

minimum retirement age; change the core eligibility criterion from years of serviceto age (the average retirement age in Brazil is only 53); create incentives for

workers to defer their retirement; and tie pension amounts to contribution records.Other focuses in regard to the civil-service plan were the abolishment of specialretirement schemes and other elements that were jeopardizing the system's actuarialviability.

1.20 As one step in resolving these problems, the authorities are seeking approval, inearly 2000, of a constitutional amendment that would boost worker and retireecontributions. However, many of these reforms will apply only to new workforce

entrants, so it will take time, and other measures, to see any significantimprovement in the social security deficit. The system's straits also are affectingstate and municipal governments, as benefit payments to retired public servants risemore quickly than the intake from active contributors.

1.21 The government is working concurrently on other urgent reforms. Among them isan overhaul of the tax system, one aim being to redistribute the tax burden and givethe nation a more equitable, efficiently managed, economically neutral taxation

system, to effectively bring down the `Brazil cost'. As of mid-2000, the economicauthorities and the legislature were developing the reform, enactment of whichwould nevertheless still have to overcome major obstacles. Among other problemsthe current Brazilian fiscal system for transfers from the federal government tosubnational governments is very complex. Since the tax burden is already quiteheavy (approximately 30% of GDP), the new tax system is not likely to increase it.Progress on this front is essential if Brazil is to raise public saving rates, whereuponit can boost public investment (which has averaged less than 2% of GDP in recent


11/42

- 6 -

ever for the nation to become competitive, particularly in the production of tradablegoods. These developments alone were enough to trigger a dynamic restructuring

process.

1.25 Industrial productivity is up sharply in recent years, showing that producers havesuccessfully adapted to the new environment despite lower tariffs and highborrowing costs. However, these gains are overshadowed by the fact that industrygrowth rates have lagged far behind other sectors.

1.26 When productivity is on the rise but growth in goods and services is sluggish, the

economy cannot create the jobs and incomes that Brazilians are demanding. Theroots of this disparity, which are lumped into the term `Brazil cost', are well known:high interest rates, onerous taxes, and inadequate infrastructure.

1.27 The country has had some success in lowering the `Brazil cost' since the early1990s thanks to the rehabilitation of transportation and energy infrastructure.However, meaningful reductions will only be achieved through sweeping public-sector reforms, to make government work more efficiently and substantially boost

public saving. For Brazil to become more competitive, simultaneous advances willbe needed on other fronts, particularly in governance. The chief impediments tobusiness operation and growth, according to IDB-World Bank business climatesurveys, are complicated regulatory frameworks, official interference in businessdecisions, and security problems.

1.28 Work to restructure the productive sectors continues today. Modernization movesthus far have focused less on heavy investment outlays than on resource


12/42

- 7 -

1.31 By late 1997, the improvements in purchasing power that price stability hadbrought to Brazil's poor came to a halt, first because the economy slowed in the

wake of the Asian crisis, and later because of the January 1999 devaluation. In thismost recent period, job creation in the formal labor market declined and thecountry's income distribution remained very uneven (in 1998, the poorest 40% ofthe economically active population received barely 9.4% of total income; thewealthiest 10% took in 46.5% of the total).

1.32 The challenges the government faces to fight poverty and promote citizenship andsocial inclusion are particularly important, especially in the northeastern region of

the country, marginal areas of major cities, and depressed rural areas. Thegovernment is taking short-, medium-, and long-term measures to address the coreissues of hunger (distribution of food to rural families in drought-stricken areas),child labor (inspection, supplementary income), and protection of the mostvulnerable segments of the population (sports, youth centers, young entrepreneurs,care and health of the elderly).

1.33 As for social services, even in an era of fiscal restraint Brazil has made impressive

gains in education and health care. Thanks to a massive campaign to make primaryschooling available to more children, educational attainment levels have climbedquickly, from under four years, on average, in 1980 to five years in 1990 and 6.5years in 1998, approximating the Latin American average. Health conditions alsoimproved considerably: between 1970 and 1997, life expectancy rose from 61 to 67years, and the infant mortality rate dropped from 95 to 34 per 1,000 live births.

1 34 Though these improvements have not been felt equally in all regions of the country


13/42

- 8 -

fewest means. Some much-needed water and sewer system extensions have beenheld up because of utility companies' institutional and financial problems.

1.37 Although in the past 10 years, women have made major strides in gaining access toeducation (primary, secondary, and higher) and entering the work force, thegovernment continues to place special emphasis on this issue, through measures toprovide both economic opportunities (training, microenterprise development) andspecific social services, mainly in the areas of child and adolescent health andprotection.

1.38 The challenge of integration. Reinvigorating and deepening regional integration isanother challenge for Brazil. Between 1990, when it first moved to open up theeconomy, and 1997, its MERCOSUR trade (exports plus imports) soared fromUS$3.8 billion (11.3% of the total) to US$18.7 billion (16.3% of the total).Difficulties triggered by the 1997 Asian crisis and the turmoil in global financialmarkets were aggravated by the January 1999 devaluation of the real. Brazil andArgentina, in particular, adopted restrictive measures (customs valuation, anti-dumping action, import licensing, inspection systems). As a result of those moves

and differences in exchange-rate policy between Brazil and its neighbors,interregional trade flows shrank abruptly, particularly in 1999 when trade was downalmost 30%.

1.39 The crux of the integration challenge for Brazil will be to return quickly to theinterregional trade growth rates achieved during the early years of MERCOSUR.As part of an initiative to "relaunch" MERCOSUR, the member states have begunadopting measures to strengthen coordination and help rekindle intraregional trade


14/42

- 9 -

such plans cover the second, third, and fourth years of one presidentialadministration and the first year of its successor.

1.42 The government that took office in January 1999 modified the multiyear planningapproach to include a preparatory study to identify development issues,opportunities and constraints, a definition of geographical "integration enclaves",and a nationwide participatory process of consultations with civil society and localauthorities. Unlike previous multiyear plans, the 2000-2003 blueprint called"Avana Brasil" will have objective implications for the programming andexecution of Bank activities. Using the new format, the authorities will be able to

identify external funding requirements, and the expected contribution of externallyfunded projects to the Plan's priority programs will be made explicit in terms ofdevelopment objectives.

1.43 The Plan identifies three key challenges for Brazil: sustained growth in a stableeconomy; economic and social progress with respect for the environment, socialjustice, and democracy; and massive investments in economic infrastructure and inthe social sphere that are to create jobs and raise incomes. The Plan states clearly

that maintaining economic stability is essential for growth with equity, pointing tothe success of efforts to tame inflation and underscoring the need for balancedpublic finances for a stable economy.

1.44 According to the Plan, the new development approach seeking integrated growth ofall regions in the country will rest on four pillars: heightening competitiveness,raising living standards, decentralizing decision-making, and careful attention to theenvironment In the integration area (development and opportunities for all regions)


15/42

- 10 -

priority programs and proposes integrated investment actions (federal, local, publicand private) worth R$317 billion for nine geographic areas or "development hubs".

1.48 For the year 2000, under the fiscal adjustment program, budgetary allocations forthe executive (not including social security, transfers to subnational governments,or payroll) total R$37.7 billion (3.51% of GDP, compared with 4.27% in 1998 and3.52% in 1999). Of that amount, 67% is earmarked for social development (42%for health, 22% for labor and employment, 7% for education, 7% for social welfare,3% for sanitation and housing, and 3% for agricultural organization); 7% for theproductive sector; and 6% for infrastructure (80% for transportation, 13% for

energy, and 7% for communications).

1.49 Macroeconomic outlook. The forecasts presented in Table 1 rest on a number ofcore assumptions. The first is that the fiscal adjustment effort will continue. Thiswould help reduce the nominal deficit quickly, from 10.3% of GDP in 1999 to5.2% in 2000 to 3.8%, on average, in 2001-2004. With this lower deficit, inflation(measured as the percentage change in the implicit GDP deflator) could be broughtdown to 3.6% in 2000 and hold fairly steady at 4.7%, on average, between 2001

and 2004.

1.50 The main premise for the marked improvement in the balance of payments positedin the table is that the country would close the period with a US$14.1 billion tradesurplus, after reporting a US$1 billion deficit in 1999. Driving the improvementwould be export growth (as a result of the new exchange-rate system), furtherproductivity gains, and a recovery of external demand. This latter factor, it shouldbe noted will depend not just on stronger economic activity in Brazil's trading


16/42

- 11 -

Table 1

BRAZIL. Macroeconomic ro ections

Actual Prelim. Pro ections 1998 1999 2000 2001 2002 2003 2004

Chan e in real GDP -0.1% 0.8% 3.3% 5.1% 4.3% 4.0% 4.2%

Inflation (chan e in im licit GDP 10.5% 6.0% 3.6% 4.3% 4.7% 4.7% 4.7%

Balance of a ments (US$ billion)

Current account deficit -33.6 -24.4 -17.5 -14.5 -14.0 -14.5 -15.0

Trade balance -6.6 -1.2 6.5 10.2 11.9 12.9 14.1

Ex orts 51.1 48.0 56.3 62.3 68.9 75.0 81.9

Imports 57.7 49.2 49.8 52.1 56.8 62.1 67.8

Services + Transfers -29.5 -25.2 -24.0 -24.7 -25.9 -27.4 -29.1

External debt (net) 206.6 189.5 185.8 181.9 179.2 176.7 173.8

Fiscal indicators

Nominal deficit as % of GDP -8.1% -10.0% -5.2% -3.1% -3.6% -4.1% -4.4%

Memorandum items

Current account deficit (% of GDP) -4.7% -4.4% -3.1% -2.5% -2.3% -2.3% -2.3%

Interest rates 28.5% 25.0% 16.7% 11.9% 13.3% 14.2% 14.2%

Exchan e rate (R$ to one U.S. dollar) 1.2 1.8 1.9 2.0 2.1 2.2 2.3

Source: IPEA. November 1999 and RE1/OD1.

II. OBJECTIVES AND STRATEGY


17/42

- 12 -

Address environmental management and natural resources problems,with an emphasis on protecting fragile ecosystems.

1. Recent Bank activities

a. The strategy pursued since 1996

2.2 A qualitative assessment of the Bank's strategy for operations in Brazil as set out inthe approved 1996 country paper points up the following:

The 1996 strategy was very much on the mark: its focuses proved to becentral issues in Brazilian development - reform of the State, reduction of the'Brazil cost', and poverty.

By virtue of the dialogue sustained between the Bank and the Brazilianauthorities, the latter gained a strong sense ofownership of the strategy.

The Bank was extremely consistent in implementing its strategy: theestablished focuses and priorities were heeded in all operations approved overthis interval. Another point worthy of note is that the strategy was appliedfrom the start, with similar numbers and volumes of approvals each year.

The Bank's actions were appropriately scaled in terms of its own outputcapacity and the country's absorption capacity (though, owing to spendingconstraints, aggregate loan approvals were lower than in the originalscenario).


18/42

- 13 -

In the areas of improving competitiveness and national and regional integration:

Expansion of road infrastructure at the federal and state levels, in cities, andlinking Brazil with its neighbors. This has had a marked effect on highway-sector administration, furthering decentralization and increasing private-sector participation.

The supply of medium-term finance to small and mid-sized businesses byway of multisector credit programs channeled through commercial banks.

Huge electric power and gas infrastructure projects to integrate differentBrazilian regions and link the country to its neighbors, with a growingmeasure of private-sector involvement.

In areas of the social agenda and urban problems:

Programs and projects to resolve problems associated with unregulated andsubstandard housing, by introducing integrated barrio improvement, housing

and services models to tackle this critical concern in Brazilian cities today.

Pioneering initiatives to address the problems of children and youth inmarginal urban areas, including training, working closely with civil society.

Support for health and education reforms and, during the crisis and fiscaladjustment, new social protection initiatives.


19/42

- 14 -

sector operations (A loans) for a total of US$389.1 million, and two EmergencyProgram operations totaling US$3.4 billion. The following table shows the number

and amount of these loans by the strategy focus pursued (of the three set out in themost recent country paper):

Investment loans * TOTAL* Number % AmountUS$Mill % AmountUS$Mill %

Reform and moderniz. of the State 4 10.2 882.0 13.9 882.0 9.1 Administrative reform 2 82.0 1.4 82.0 0.8 Fiscal management 2 800.0 12.6 800.0 8.2Modern. of prod. and Brazil cost 17 43.6 2,697.1 42.6 3,897.1 40.1 Transportation 11 1,200.1 19.0 1,200.1 12.3 Energy 4 722.0 11.4 722.0 7.4

Credit 1 750.0 11.9 1,950.0 20.0 Other (liberaliz.) 1 25.0 0.4 25.0 0.3Social inequities and poverty 18 46.2 2,749.8 43.4 4,949.8 50.9 Education 3 600.0 9.5 600.0 6.2 Health 2 535.0 8.5 535.0 5.5 Urban poverty 4 829.0 13.1 829.0 8.5 Social reform and protection 1 42.0 0.7 2,242.0 23.0 Sanitation 3 296.3 4.7 296.3 3.0 Tourism and environment 3 97.5 1.5 97.5 1.0 Other social (credit) 2 350.0 5.5 350.0 3.6

TOTAL 39 100.0 6,328.9 100.0 9,728.9 100.0* Note: Investment loan figures include eight PRI operations; TOTAL includes two EmergencyProgram loans.

2.7 The volume of 1996-1999 approvals added greatly to the size and complexity of theBank's portfolio of active loans in Brazil, which is its largest. As significant as theportfolio's rapid growth and aggregate amount are the large number of operations


20/42

- 15 -

enterprises (SMEs). The social protection operation was approved by the BrazilianSenate after lengthy committee reviews that sparked wide-ranging public debate on

the situation of the most vulnerable segments of society during the financial crisisand how they would be affected by adjustment measures and tightened spending.The first disbursement under that program (US$1.122 billion) was released inDecember 1999; as of February 2000 over US$500 million had been disbursed forthe SME operation.

2.10 Complex though the portfolio of Bank operations in Brazil may be, itsimplementation record has traditionally been very good thanks to a coordinated

monitoring system and periodic meetings between the Ministry of Planning'sInternational Affairs Secretariat and the Bank. According to the December 1998portfolio performance review, it was "probable" or "very probable" that all theprograms would achieve their development objectives; only four loans were rated"unsatisfactory" as to execution, a showing consistent with previous years.

2.11 Nevertheless, the tightening of government spending since 1999 is having an effecton the portfolio, reflected in a new kind of "operation with implementation

problems" where the difficulties are not stemming from internal situations and thesolution lies outside the control of the executing agencies and the Bank. In theDecember 1999 review exercise, the implementation of 15 programs (of 48evaluated) was rated unsatisfactory. The problem in eight of the operations was theavailability of funds; in six, the unsatisfactory rating can be attributed entirely tospending authorization constraints. As for "development objectives", it wasreported that all but one of the projects would "probably" or "very probably" meetthose goals The single exception was given a temporary rating of "doubtful"; the


21/42

- 16 -

2.14 The proposed Bank action implies concurrent, integrated work in the four strategicareas identified to achieve the central objective of growth with stability and

reducing inequality and poverty. It reflects the understanding that in order toachieve the social objective ofreducing poverty and inequality and the economicobjective ofgrowth with stability in the long term, there is an urgent need formodernization of the State, improved competitiveness, and economicmodernization through a complex set of integrated activities at the federal, state,and local levels involving both the public and private sectors.

2.15 Because of the magnitude of the challenges facing Brazil and its vast geographic

expanse, the Bank will endeavor in each priority target area to select spheres inwhich the impact of its contribution can be maximized. It also will seek ways inwhich it can efficiently serve smaller, dispersed borrowers (small and mid-sizedbusinesses and microenterprises, municipal governments). To that end, it will helpforge strategic partnerships with Brazilian institutions that can bring experience andexpertise while mobilizing resources of their own for such efforts. A first step inthis direction was the initiative launched with BNDES in 1998.

a. Modernization of the State

2.16 Modernization of the State is the most critical challenge for Brazil for twointerrelated reasons. First, if it can advance in this area the country can reverse thedownturn in public saving, which measured by the national accounts plunged from5.9% of GDP, on average, in the 1970s to -0.7% of GDP in 1996-1997. Second,Brazil's success in tackling its other challenges will unquestionably depend on itssuccess in boosting public saving This is particularly true in the case of


22/42

- 17 -

management of the private and public social security schemes (contributions,awarding of benefits), the design of social security models at the subnational level,

and pension fund development and management. Second, the Bank will step up itssupport for the area of administrative and fiscal modernization at the federal,state and municipal levels. These efforts would directly complement the strategicobjectives in the government's Multiyear Plan: balance the public finances andmake government work more efficiently.

Active operations US$MILL New operations identified US$MILLFISCAL MANAGEMENT, STATES 500.0 MODERNIZ.SOC.SEC.REVENUE AREA 85.0NETWORK IPEA, IBGE, FGV & OTHERS 25.0 FISCAL MGT. MUNICIPALITIES 2 400.0TC EXTERNAL RELATIONS 10.0 COMPETITION POLICY (MIF) 0.5

TC TAX ADMINISTRATION 78.0ADMIN. REFORM-MIN.STATE ADMIN. 57.0LEGISL. INTEGRATION 25.0FISCAL MANAGEMENT, MUNICIPALIT IES 300.0REGUL. FRAMEWORK PENSIONS (MIF) 1.2LABOR MEDIATION (MIF) 1.5CONSUMER PROTECTION (MIF) 0.8MEDIATION AND ARBITRATION (MIF) 1.0

b. Improving competitiveness and market access by lowering the'Brazil cost' and modernizing the economy

2.19 The Bank will give continuing priority to lowering the 'Brazil cost' and modernizingproductive sectors, by supporting the country's efforts to invigorate infrastructureinvestment, strengthen the financial sector, serve the needs of SMEs andmicroenterprise, promote occupational health programs, improve the environmentalquality of productive activities, develop tourism, and bring in sound regulatoryframeworks. Support for these areas will be provided as well by the MIF and the

i i d hi h ill i i h l i i d i


23/42

- 18 -

and rehabilitation of the federal highway system, including road transfers to thestates; rehabilitation, expansion and concessioning out of major arterials, withspecial support from PRI; state roads programs, including strengthening of roadmanagement and maintenance agencies; and direct finance for privateconcessionaires.

2.23 Urban transit. The increase in the number of vehicles moving around Brazil'slargest cities is worsening pollution, lengthening travel times, and generally drivingup transportation costs, taking a particular toll on low-income residents who rely onpublic transit. The Bank will continue to support the development of economically

efficient, environmentally sustainable urban transit approaches, building onsuccessful ventures in the country like the Curitiba bus system and So Paulo'scommuter train network. Priorities in all such programs will be traffic safety andprivate-sector involvement.

2.24 Transportation sector reforms will open up new opportunities for project financeand technical assistance in the port, airport, and rail transport spheres. For ports,Bank efforts can help lower foreign-trade costs through modernization projects and

institution-strengthening. Forairports it can support the building and expansion offacilities, particularly in promising areas for tourism development, and initiativesinvolving air transport safety. Its role in railroad projects could be to help Brazilintegrate its rail systems with those of neighboring countries and mesh theoperations of different national concessionaires.

Active operations US$MILL New operations identified US$MILLSTA CATARINA ROADS 102.5 TRAFFIC SAFETY IN CITIES TBDFERNAO DIAS HIGHWAY 267 0 SO PAULO ROADS 150 0


24/42

- 19 -

in association with Petrobrs, in which the State will retain substantialshareholdings.

2.26 To assist Brazil as it modernizes its productive sectors, the Bank will step upsupport for both public and private agents in the transition to open markets, and willhelp in the implementation of lasting reforms. In the electricity sector it will buildon previous initiatives in the areas of institution-strengthening, studies, and long-range planning, and support the organization of the natural gas market, which couldinclude transportation and distribution project finance. Such support would beextended to state regulatory and concession oversight bodies, the priority being to

maintain and improve the technical caliber hitherto evinced by the public sector insuch key areas as long-range planning and the engineering and operation ofcomplex systems.

2.27 Expansion of the electric transmission system. For the medium term, the newregulatory framework leaves the public sector at the center of the powertransmission sector, through State companies to be set up when the currentintegrated electric utilities are unbundled. By virtue of a recent government

decision, expansion projects are to be tendered out as private-sector concessions. Asan adjunct, the government has mapped out a major transmission investment planfor the coming years, which will be crucial to avoid service interruptions andexpand the grid. Successful restructuring of the transmission system also is crucialfor sector reforms to be sustainable, so providers can deliver quality services ataffordable prices and private investors can be confident that the power they produceor distribute will reach end users.


25/42

- 20 -

2.30 Integration infrastructure. The Bank will keep up support for integrationinfrastructure projects, notably to expedite binational power projects that are verycomplicated to arrange and finance because different countries' institutional featureshave to be made compatible. Transportation will be another focus, to tacklefundamental regulatory and institutional issues that are key to lowering costs andimproving the quality of service between countries in the region. Coordinatinginitiatives to facilitate multimodal transport and smooth customs entry would beimportant activities to that end.

Active operations US$MILL New operations identified US$MILL

BOLIVIA-BRAZIL INTEG.GAS PIPEL. 240.0 MERCOSUR HIGHWAY 2 322.0MERCOSUR HIGHWAY 450.0 MERCOSUR HIGHWAY 3 TBD

2.31 Financial sector. As in the past, the Bank will focus on activities to givemicroenterprises and SMEs broader and deeper access to the financial markets,supporting the government's ambitious plan to develop microfinance programs.This will mean promoting innovative technologies that can lower intermediationcosts, and developing services to better mobilize domestic saving. A second

continuing focus of support will be the strengthening of second-tier operations ofgovernment-owned banks and other public financial agencies, to boost the volumeof long-term funds those institutions inject into the economy while making certainthe money is channeled on true market terms, and encourage private commercialbanks to do more production credit business. Other prospective targets for Banksupport are regulation and oversight, reform of state banks, development ofnonbank sources of long-term finance, and capital markets.


26/42

- 21 -

2.34 The Bank has approved 37 small projects totaling US$17 million in this area plusassociated technical cooperation operations, most of them designed to strengthenNGO-operated microfinance programs. The Bank also has technical cooperationoperations under way through BNDES and the National Federation of Support toSmall Business, to strengthen microfinance institutions. The 1998 credit programwith BNDES earmarked US$150 million for microenterprises. The Bank willcontinue to support the development of sustainable microenterprises and, inparticular, will foster the development of institutions prepared to gear their productsto the needs of these businesses and serve low-income and minority (indigenousand women) microentrepreneurs.

2.35 Support for technology development. Brazil needs to continue modernizing itseconomy in order to position it securely in the competitive global marketplace. Tokeep pace with progress elsewhere, its productive sectors have no choice but toconstantly innovate and adopt new technologies. University research teams andgovernment institutes will have to build more meaningful links to the producingsectors without compromising the caliber of their work, and support for basicscience will need to be stepped up, with careful attention to quality to meet

internationally accepted standards.

2.36 To assist in Brazil's efforts to make its exports more competitive, the Bank willsupport: (i) participation in cooperative ventures; (ii) technology enclaves andparks, including business incubators; (iii) development of basic industrialtechnology infrastructure and technology management and planning programs;(iv) strengthening of technology training tailored to specific business needs;(v) expansion of technology and engineering extension services; and (vi) bolstering


27/42

- 22 -

group is currently examining a plan to remove constraints to tourism growth (airtransport, training, infrastructure, public safety).

2.39 Priority in Bank financing will go to projects that bring private money into thesector and form enough of a critical mass to be able to promote at home and inforeign markets. Since developing a tourist attraction is a multisectoral endeavorinvolving zoning, water and sewer systems, city sanitation, transportation, andenvironmental protection, a parallel focus of the Bank's strategy will be tostrengthen institutional capacity in the public sector. Studies also would be done tohelp the government craft national and regional tourism strategies and to look at therelationship between developing tourism and preserving the country's natural andhistorical heritage.

Active operations US$MILL New operations identified US$MILLPRODETUR 400.0 PRODETUR 2 NORTHEAST 300.0HISTORICAL HERITAGE 62.5 PRODETUR SOUTH 200.0ECOTUR 11.0 ECOTUR 2 TBD ECOTOURISM STRATEGY (Study)

2.40 Agriculture. The agriculture sector figures prominently in Brazil's move toward a

stable, open, globally integrated economy. However, if the sector is to continue tohone its competitive advantages, it will have to contend with a number of seriouschallenges, for instance: (i) shift government action to areas of the public welfarethat cannot be left to the marketplace and encourage private enterprise to invest inthe sector; (ii) regulate the pushing back of the agricultural frontier, protectingfragile natural resources; (iii) spur changes in the land tenure system to ensure moreequitable distribution of that resource and more technically and economicallyffi i t l d d (i ) t d di i t i d t h l i t


28/42

- 23 -

systems, closer coordination between the agencies involved, and promotion ofschemes that are financially self-sustaining; (iii) improvement of animal healthand plant protection and food safety systems, to meet international standards andreduce productivity losses caused by pests and disease; and (iv) alleviation ofruralpoverty, through programs and productive and social investments to improve livingconditions in rural areas, help consolidate communities of settlers, and curbmigration by training rural workers for new kinds of jobs in the community.

Active operations US$MILL New operations identified US$MILLMODERNIZ.AGRICULTURE 67.5 RURAL SETTLEMENTS 50.0NEW IRRIGATION MODEL (MIF) 1.4 METEOROLOGY 50.0 AGRICULTURAL RESEARCH 60.0

NEW IRRIGATION MODEL 90.0 RURAL SECTOR OPER.STRATEGY (Study)

c. Reducing social inequities and poverty

2.43 Actions identified by the Bank for this strategy focus in the coming years fitperfectly within the government's "A More Just Brazil" program, one of thepriorities in its Multiyear "Avana Brasil" Plan.

2.44 As Brazil strives to complete a socially equitable fiscal adjustment program,questions of targeting and efficiency of social spending need to come further to thefore in the Bank's strategy. Hence, priorities for its support will be: (i) an analysis ofthe distributional impact of social spending and development of systems to bettertarget public monies to the most vulnerable groups, with consistent considerationof gender factors and care for children and the elderly; (ii) implementation,strengthening, and evaluation of the social safety net, backing actions that can do


29/42

- 24 -

2.46 Though there is near-universal access (95%) to primary schooling in Brazil, highrepetition and dropout rates and the number of over-age students are still a problem:only 65% of children who start grade 1 are likely to finish primary studies. Thehigh-school enrollment ratio is a low 31% because so many children nevercomplete the full primary cycle and because of secondary-school repeater anddropout rates and over-age enrollees. Only 35% of any given grade 1 cohort willfinish high school. As for equity of completion rates, only 13% of children frompoor families manage to finish primary school and only 4% make it throughsecondary school.

2.47 The country's most serious challenge thus is secondary education, to improveenrollment figures, efficiency, quality, and equity. State education systems are notequipped to meet the demand: their curricula are outdated, they need better trainedteachers, and they lack the requisite infrastructure and materials. A massive effort isneeded urgently on this front.

2.48 In light of these conditions, the Bank will support activities to: (i) improve thequality of education, particularly at the secondary level during which students

receive their preparation for the working world; (ii) expand the education system,again concentrating on secondary education and on measures to make schoolingaccessible to disadvantaged groups; and (iii) modernize state education systems andenhance spending efficiency.

2.49 The Bank has been a prominent supporter of education projects and programs inBrazil in recent years, notably for secondary and nonuniversity postsecondaryeducation including special sectoral studies and projects Its role will be heightened


30/42

- 25 -

look at individual patients rather than the community and tend to concentrate ontreatment that is not cost-effective from the standpoint of its impact on the healthstatus of the population. Persistent inequities in resource distribution account for themarked differences in health conditions from one state and municipality to another.Critical needs in this regard, according to the country's health authorities, are humanresources training and development with a strong health promotion and diseaseprevention thrust, to improve primary health care outcomes and encouragecommunity involvement.

2.52 The Bank will support efforts to: (i) target resources to illnesses that are accountingfor the heaviest share of the country's burden of disease, and to groups that are themost vulnerable economically and geographically, encouraging initiatives like theFamily Health Program that involves the community in solving its health problems,with an emphasis on promotion and prevention; (ii) decentralize SUS managementto the states and municipalities, spurring innovative local management approachesthat segregate funding and service delivery functions; (iii) promote humanresources training and professional development; and (iv) strengthen the regulatoryframework for private health-insurance organizations and accreditation of private

providers, better meshing that system with government health-care deliverystrategies.

Active operations US$MILL New operations identified US$MILLHEALTH REFORM AND INVEST. 350.0 PRIVATE HEALTHCARE ORGS. 35.0PRIVATE INVESTM.HEALTH BNDES 100.0 NATIONAL HEALTH CARD 50.0PROFESS.DEVT.HEALTH WORKERS 185.0 REGUL. HEALTH PLANS (MIF) 1.3 HEALTH EXPENDITURE (Study) 10 YEARS OF THE SINGLE SYSTEM (Study)


31/42

- 26 -

2.56 Urban and municipal development. In a country as highly urbanized as Brazilwhere responsibility for many services has already been decentralized, the urbansector is a key piece in the development strategy. Municipal governments areshouldering more and more social-sector responsibilities, including basic education,health care, welfare services, and poverty alleviation programs. Since spending onurban infrastructure has lagged far behind urban growth, actions to build upinfrastructure and provide low-cost housing can significantly improve the lives ofcity residents.

2.57 The Bank will support capacity-building activities to equip municipalities tomanage urban and social activities and fund them with locally generated revenues,so as to make the decentralized government model workable (strengthening ofmunicipal management, fostering intermunicipal collaboration for delivery ofcommon services, pursuit of efficient models to contend with problems ofunregulated urbanization).

2.58 Low-cost housing. The growth in Brazil's economy and in its population arewidening the gap between the demand for accommodation and the stock of basichousing that low-income groups can afford. The result has been a surge insubstandard dwellings (shantytowns, illegal subdivisions, shared accommodation).The government is pushing for housing finance reform, but specific action isneeded if the poorest Brazilians are to benefit from the improvements - targetedsubsidies and mechanisms to encourage families' own efforts and private-sectorparticipation, for instance. To continue its support to this sector the Bank will fosteractivities that can have a demonstration effect in barrio and housing improvements,like the successful efforts under way in Rio de Janeiro and So Paulo The Bank


32/42

- 27 -

the population with water and sewerage services, attract private enterprise to thesector, make service delivery more efficient, and protect the environment.

Active operations US$MILL New operations identified US$MILLSOCIAL ACTION-SANITATION 50.0 URBAN IMPROVEMENT RIO 2 200.0SANITATION AND ROADS-BELEM 145.0 SANITATION IGARAPES MANAUS 50.0GUANABARA BAY CLEANUP 350.0 SANITATION FEDERAL DISTRICT 130.0ENVIRON.AMELIORATION-GUAIBA 132.3 SANITATION GOIAS 70.0FAVELA B. RIO JANEIRO 180.0 REHAB.MULTIFAM.HOUSING SO PAULO 70.0URBAN DEVELOPMENT-PARANA 249.0 SOCIAL ACTION-SANITATION 250.0FAVELA IMPROVEMENT-SO PAULO 150.0 ENVIR. AMELIOR. GUAIBA 2 100.0ENVIRON.-TODOS LOS SANTOS 264.0 GUANABARA BAY CLEANUP 2 350.0BAIXADA VIVA-RIO DE JANEIRO STATE 180.0 SANITATION CEARA 2 100.0MUNICIPAL DEVT. PORTO ALEGRE 76.5FAVELA IMPROVEMENT (HABITAR) 250.0

FLOOD CONTROL CAMPINAS 19.8SANITATION TIETE 2 200.0SOCIAL REFORM CEARA 42.0SOCIAL PROTECTION (EMERGENCY) 2,220.0REG.FRAMEWORK WATER GOIAS (MIF) 0.7

d. Environment and natural resources

2.62 Brazil has the greatest biodiversity on earth, along with 40% of the tropicalrainforests and 20% of the freshwater in the world. One of Brazil's preeminent

concerns is to protect and preserve its natural heritage and make sustainable use ofits resource endowment. The Bank's activities in the environmental sphere cutacross all its priority action areas. Key focuses are urban sanitation (describedabove under "Urban problems"), which takes in traditional targets of Bank support:water, sewage conveyance and treatment systems, pollution, and solid waste; theenvironmental impact of productive activities (mentioned in the section oncompetitiveness), and natural resources management. Bank efforts in these areas


33/42

- 28 -

licensing agencies, and projects and programs designed from the start to give civilsociety organizations and the private sector more of a role in conservation activities,are additional Bank strategy focuses.

Active operations US$MILL New operations identified US$MILLDRAINAGE-SO PAULO 302,0 SUSTAIN.WETLANDS DEVT. 100,0DRAINAGE-RIO JANEIRO 30,0 MATA PERNAMBUCO ZONE 120.0ENVIRONMENT FUND 2 24,0 MICRODRAINAGE SAO PAULO 300,0Others described under Urban/Sanit. par. 2.60 SUSTAINABLE DEVT. ACRE 50,0 ENVIRON. DEVT. TOCANTINS TBD INDUSTRIAL POLLUTION CONTROL (Study)

3. Bank support for integration

2.65 The various action areas targeted in the Bank's strategy contain elements to helpBrazil reinvigorate and deepen regional integration. The Bank thus seeks both todeepen the activities in this area and to identify new ones (nontraditional activitiesfor integration). To supplement the measures taken to date, which have had asignificant impact, focusing on the transportation and energy sectors, the Bank willmaintain and step up its support for physical integration projects (highways, powertransmission systems, gas pipelines, removal of restrictions in border areas), help

identify regional financing mechanisms, and provide nonfinancial support for thedevelopment of regulatory systems to facilitate regional trade and other integrationinitiatives, including nontraditional areas such as health and education. Many of theactivities identified on a preliminary basis in the operations program for thecountry, particularly in infrastructure, even though that area concerns localdevelopment, may contribute to regional integration. The Bank will also make aspecial effort to include specific components and activities in other projects


34/42

- 29 -

2.68 Starting in 1995, as part of its policy to make social spending more effective, thegovernment did away with the main agencies that had had direct responsibility forsocial assistance, strengthened the sector ministries in charge of the social safety

net, and fostered the creation of solid partnerships with civil society, to ensure thatthe fruits of growth would be equitably shared.

2.69 The Bank has supported Brazilian government efforts to better coordinate a set ofpriority social programs through the " Community Solidarity" program, and inpoverty alleviation programs it will continue to help forge partnerships between thefederal government, municipal governments, and different quarters of civil society.The Bank will also continue to create opportunities and improve systems for all thestakeholders in the initiatives supported by the Bank to be adequately involved andparticipate in the processes that affect them. It will support dialogue and actions tobolster relations between the government and civil society organizations that aremost effective in reaching the population, and to firm up a strategy of sharedresponsibility for development. Special attention will be paid to sharedresponsibility for activities to fight poverty and for environmental management.

5. Lending scenarios

2.70 Given the magnitude of Brazil's needs, two considerations in putting together Banklending scenarios are the Bank's own institutional capacity and the debt ceilings thecountry adopts. The country paper approved in 1996 set out a base lending scenarioof US$6 billion over three years (an annual average of US$2 billion). Totalapprovals for the three-year period 1996-1998, which were lower than the basescenario owing to spending restrictions came to US$4 785 3 million averaging


35/42

- 30 -

are maintained, new debt (in those cases directly involving the federal government)must remain at levels consistent with the alternative low spending scenario.

2.73 The general exposure indicators are eminently reasonable considering the volumeof Bank financing relative to the size of the Brazilian economy. The ratio most inneed of close monitoring is Brazil's debt to the Bank as a share of aggregateborrowing member country debt to the institution. Between 1990 and 1995 thatratio dropped from 12.8% to 10.6%, but it has been on the rise ever since: 11.4% in1996, 13.3% in 1997, 15.5% in 1998. Emergency-loan disbursements in 1999 madefor a temporary high concentration that pushed the percentage to 19.1%; it will riseagain in 2000 to 21.5% or 22.4% depending on the lending scenario. However, theratio would trend down as Brazil began to repay those loans in 2001 or 2002.

6. Coordination with Private Sector Group instruments

2.74 Private Sector Department (PRI). Since its first operations in 1995 PRI hastargeted the transportation and energy sectors, supporting operations that havecontributed to the modernization of Brazil's economy generally and to itsprivatization program in particular. In the process PRI has developed a solid, close

relationship with Banco Nacional de Desenvolvimento Econmico e Social(BNDES). Its preeminent focus will continue to be infrastructure projects, seekingto maximize the Bank's presence in leveraging additional funds. To that end, thedepartment is working with Region 1, the Brazilian government, Eletrobrs,Petrobrs, and BNDES to develop and implement its operations program. Apartfrom its traditional support for transport and energy ventures, PRI will exploreopportunities in the basic sanitation sector in various states and larger


36/42

- 31 -

corporate lending; it is currently looking at projects in the hotel and tourism,infrastructure, consumer products, and food processing areas. As for financialservices, the IIC's strategy is to provide loans and equity finance to new specialized

financial intermediaries and to develop special lending facilities whereby banksonlend IIC funds to small and medium-sized businesses. Consideration is beinggiven to including mortgage administrators and securitizers as specialized financialintermediaries. There are no plans in the immediate future to acquire further stakesin private investment funds, since only three of the four funds are fully invested.

7. Complementarity with other funding sources

2.77 The Bank's activities in Brazil dovetail closely with those of other external agenciesand funders, particularly the International Monetary Fund, the World Bank, andJapan. Just how efficiently this meshing of efforts can work was pointed up as asupport package was put together to help Brazil deal with the financial crisis. Thisshould continue to be a feature of Bank activities in Brazil, to maximize theefficiency and impact of its contribution.

2.78 International Monetary Fund (IMF). The IMF has played a strategic role inBrazil, helping the country withstand the spillover from the Asian crisis. Its supportbegan in November 1998 with a standby arrangement for SDR 13 billion(US$18.1 billion); increasing the primary surplus was the principal performancetarget. That facility paved the way for US$41 billion in funding mobilized by theinternational community, including strong support from the Bank in the form ofUS$3.4 billion in emergency loans. The arrangement with Brazil was revised inMarch 1999 to reflect the impact of the devaluation The country met every one of


37/42

- 32 -

premier provider of external assistance, notably for initiatives with the federal level,where infrastructure and the environment have been its primary focuses.

8. Strategy implementation risks

2.81 Brazil's strategy, and by extension the Bank's, could be open to different kinds ofrisks. Chief among them would be a loss of momentum of the fiscal adjustmentprocess. It will be difficult for the government to repeat the substantial primary-surplus gains it achieved in 1999; chances of further improvements will hinge onthe country's capacity to continue moving through and securing the passage ofpending structural reforms and constitutional amendments and then implementing

them. Particularly important are changes to the tax and social security systems andpieces of legislation like the Fiscal Responsibility Act that will be key tostrengthening the management of state finances. The round of municipal electionsslated for late 2000 also could slow the adoption of outstanding reforms, or reformscould end up being less comprehensive. One external risk for the country's strategyhas to do with export performance. In principle, Brazil's external prospectsimproved considerably with the January 1999 decision to let the exchange ratefloat. Though the devaluation did not have the anticipated effect on exports in valueterms, export volumes do appear to have been on the rise since August 1999.However, the pace of export growth is a concern, especially if Latin America doesnot bound back from the steep 1999 recession. Above all, Brazil would be affectedby the situation of Argentina, its main MERCOSUR trading partner.

9. Monitoring the strategy's implementation

33


38/42

- 33 -

III. TOPICS FORDIALOGUE WITH THE AUTHORITIES

3.1 The following items should be high on the agenda for dialogue between the Bankand the Brazilian authorities:

The Bank's priorities (poverty, reform of the State, competitiveness, andintegration) as a general framework for its action in Brazil and as adeterminant of specific actions called for in the strategy.

Progress in Brazil's ongoing adjustment program.

Implementation of the emergency operations the Bank approved as part ofthe international community's response, and the adjustment program's effectson the Bank's portfolio and pipeline (stemming from spending restrictions).

The status of strategic reforms requiring legislative approval (social security,fiscal responsibility, taxation) and how the Bank might be of service onthese fronts.

The financial condition ofsubnational governments and its implications forfuture Bank operations with states and municipalities.

Progress on the Multiyear "Avana Brasil" Plan, particularly as regards thestrategy's consistency with the Plan and the anticipated demand for externalfinancing (areas, amounts).


39/42


40/42

Matrix for Bank action in Brazil

Main government actions and policies The Bank's strategy Focuses of Bank action Other agencies Key indicators

The challenge of achieving faster, more equitable and sustainable growth

Continue with fiscal adjustment Step up the privatization program Reduce the current-account deficit Institute inflation targeting

Support the macroeconomic adjust-ment, particularly in pursuit ofmodernization of the State

Finish disbursing the 1999emergency loans

IMF and World Bank aresupporting the country'smacroeconomicadjustment effort

Reduction in current-account and fiscal deficitsas percentages of GDP

Lowering of interest rates

The challenge of reform and modernization of the State

Reform of the social security system Fiscal Responsibility Act Tax reform Privatization program Regulatory frameworks Strengthening tax administration Accelerating fiscal adjustment with thestates

Heighten the Bank's catalytic role inareas of municipal governmentstrengthening, in fiscal managementand administration areas and formore efficient basic service delivery

Modernization of the social securitysystem

Management of municipalfinances

Preparation of basic studiesfor reforms

Regulatory bodies andframeworks (MIF)

Social security systemsmodernization

World Bank: socialsecurity and social sectorreforms; support forfiscal adjustment in thestates

Public saving (Given theurgent need for macro-economic adjustment toease imbalances in thepublic finances and balanceof payments, public savingis seen as the mostcritical variable in theshort and medium term.)

Modernization ofadministrative and fiscal

management:* 700municipalities. Municipal managementefficiency:* 35% inmunicipalities with over200,000 inhabitants; 10%income for investment.

The challenge of heightening competitiveness


41/42

- 2 -

Improved nutrition andhigher enrollment rates forchildren in difficultcircumstances

More self-reliant ruralsettlements

Better sewage treatment

The integration challenge

Reinvigorate and deepen regionalintegration, including new action areas

Step up action in traditional andnontraditional areas

Support for highway, powertransmission, oil pipelineintegration projects

Border area initiatives Health and education

integration activities Regional financing

mechanisms

Infrastructure improvementsin Brazil and the region

Improvements in regional

trade indicators Nonconventional integrationactions

*= goals for projects BR-0273 (favela improvement) and BR-0286 (municipal fiscal management)**= goals for the 2000-2003 multiyearAvana Brasilplan

1. Social indicators

Population (millions, 1999) 164.9

U d 1 (% 1998) 31 9% 1 T t l dit b 1/

Multiyear "Avana Brasil" Plan (PPA)

(in billions of current R$)


42/42

Under 15 (%, 1998) 31.9% 1. Total expenditure by year1/

Annual growth rate (1989-1998) 1.3% 2000 248.886

Vital statistics 2001 274.719

Infant mortality rate 2002 289.452

(per 1,000 live births) 1997 34 2003 300.256

Poverty and inequality Total 1,113.323

Monthly income by decile 2. Sectoral breakdown of

(% of total in 1995) PPA public expenditure 2/

40% poorest 8.9% * Social development 585.019

10% wealthiest 45.0% * Physical infrastructure 219.017

Education * Environment 3.353

Gross primary enrollment ratio, 1995 117.4 * Productive sectors 134.838

Gross secondary enrollment ratio, 1995 47.4 * Justice and civil society 4.038Average years' schooling, 1995 * Other 38.661

(over-25 population) 3.9 Total 984.926

Illiteracy rate (% in 1997) 16.1 1/ Includes private sector.

2/ Includes R$107 billion in

private-sector resources.Source: Planning and Administration Ministry.

2. Economic Indicators 1995 1996 1997 1998 1999 *

Real GDP (% change) 4.2 2.6 3.6 -0.1 0.8

Per capita GDP (% change) 2.8 1.3 2.2 -1.5 -0.5

Nonfinancial public sector (% of GDP)

Borrowing requirement 7.2 5.7 4.2 8 10.0

Primary balance ( - = surplus) -0.4 -0.1 -1.0 -0.1 -3.1

Money and credit (% of GDP)

Domestic credit 32.7 37.6 35.4 42.1 32.9Money supply (M1) 3.2 4 4.8 5.4 5.2

Prices and wages (% change)

Consumer prices (IPCA) 66 15.8 5.2 1.7 8.9

Real wage 10.4 7.4 2.1 -0.4 s.d.

Exchange rate

Market rate (R$/US$) 0.92 1.01 1.08 1.16 1.85

Effective real exchange rate index

(1990 = 100) 112.4 106.2 101.8 104.2 157.7

Balance of payments (US$million)

Current-account balance -18.136 -23.248 -30.491 -33.829 -24.375

Trade balance -3.157 -5.453 -6.652 -6.603 -1.198

Exports of goods 46.506 47.851 53.189 51.136 48.011

Imports of goods 49.663 53.304 59.841 57.739 49.201

Balance of services -18.600 -20.272 -25.653 -28.662 -25.202Balance on capital and financial account 29.609 33.566 25.367 29.375 16.552

Change in reserves (- = increase) -12.920 -8.326 8.284 6.990 7.822

External debt (US$ million) 158.236 178.037 191.084 s.d s.d.Interest as % of goods and services exports 12.6% 31.5% 33.9% 39.1% s.d.

* preliminarySources : IBGE, IDB (Statistics and Quantitative Analysis Unit) y IDB (RE1/OD1)

idb - country strategy with brazil

Documents