The growth rate was less than half of the 4.9 percent posted in 2004, according to Brazil’s IBGE Census Bureau. GDP measures the value of all goods and services produced in a country.

"To grow faster, interest rates need to go down more," said Jason Vieira, chief economist at the GRC Visão consultancy in São Paulo.

The central bank had elevated its benchmark Selic interest rate by 3.75 percentage points in the 12 months through August 2005, reaching a high of 19.75 percent annually to keep inflation in check. The Selic rate started declining in September and now stands at 17.25 percent.

Last year’s GDP growth was led by mineral extraction, which grew 10.9 percent. Industry increased 2.5 percent and services expanded 2 percent from 2004.

Agriculture rose just 0.8 percent, the poorest performance since 1997, when it fell by 0.8 percent, IBGE said. A drought in the south hurt grains and an outbreak of foot-and-mouth disease led to a drop in meat exports.

The mediocre growth rate may be bad news for Brazilian President Luiz Inácio Lula da Silva, who likely will run for a second four-year term in October.

The run-up to the October election may itself boost growth, GRC Visão’s Vieira said, as the government likely will increase spending. Also, temporary jobs will be created for political campaigns, leaving Brazilians with more money to spend.

Economists expect growth to pick up this year, leading to a full-year GDP expansion of between 3.5 percent and four percent.

Late last year, Finance Minister Antonio Palocci predicted Brazil’s economy would grow by close to five percent in 2006.

Mercopress – www.mercopress.com

The latest report indicates the 1.2% drop in the GDP registered in the third quarter by the Brazilian Institute of Geography and Statistics (IBGE) as one of the main reasons for the lower estimate. The outlook for 2006 is for the GDP to grow 4%.

The report also estimates that the Broad Consumer Price Index (IPCA), which is the index of inflation used by the Brazilian government, will end the year at 5.7%, above the 4.5% target set by Brazil’s National Monetary Council (CMN). The BC is operating under the assumption that inflation will amount to 3.8% in 2006 and 3.6% in 2007.

In the judgment of the BC’s director of Economic Policy, Afonso Bevilaqua, the drop in the estimated GDP growth is "a thing of the past."

According to him, the prospect is one of recovery in the final quarter of 2005, due to the increase in the number of jobs and the real salary mass, as well as inventory equilibrium in the productive sector and credit expansion.

Bevilaqua observes that preliminary industrial and commercial data suggest a "more dynamic" economy from November on, which should ensure 3% growth in industry, 2.1% in services, and 1.5% in the agricultural sector in 2005.

The BC expects recovery in all segments of the economy next year: 5.3% growth in industry, 4.8% in agriculture, and 2.9% in services.

The performance of Brazil’s industry, he adds, should receive direct, positive impacts from domestic petroleum production and the favorable international economic situation, even with the slight decline in international oil prices.

The projection for the performance of the Brazilian agriculture is based on the estimated 2005/2006 agricultural harvest, in which grain production is expected to increase 12%.

Agência Brasil

Brazil’s President Lula da Silva is immersed in a seemingly endless corruption scandal; his once larger-than-life reputation has been reduced to tatters. The significance of this is not negligible: Lula has become an emblem of the post-Cold War Left with his combination of conservative fiscal and monetary policies and big social programs targeting the poor.

A breathtaking sequence of revelations involving the government and Lula’s Workers’ Party – beginning with the confession by opposition legislator Roberto Jefferson that he had received bribes for his vote in Congress – has brought to the surface a vast scheme of bribes to legislators and irregular methods of party financing.

The conventional wisdom was that, despite his radical Marxist roots and occasional concessions to his political base, Lula represented a healthy move away from the old Left and toward the emergence of a new model for underdeveloped nations similar to Europe’s social democracy. Many thought this model would have a moderating effect on the left across the continent and hold Hugo Chávez in check.

However, Lula’s capacity to reinvent the Left always hinged on something more than keeping interest rates high to stem inflation, maintaining a strong currency, riding on the high prices of certain commodities, and giving cash to poor families.

He could either opt for simply managing the perpetual crisis or he could try to overhaul a labyrinthine political system that benefits certain pockets of industrial and agricultural production but keeps millions of people out of the realm of opportunity. He chose the former path.

While technocrats talk about a three percent rate of economic growth for Brazil this year and an export boom that has translated into a trade “surplus” of US$ 40 billion, Lula’s voters are indignant at the corruption scandal. But the real point is that corruption has developed naturally in an environment of limited opportunities due to asphyxiating government interference.

And the absence of adequate limits on the power of the political bureaucracy is in turn an incentive for corruption at the top level. The corruption of Lula’s government, therefore, should be seen more as a symptom than a cause.

Ranting about corruption without removing the causes will only generate further frustration. Brazilians impeached President Collor de Mello in the 1990s but failed to change a system that ensured a party like Lula’s would fall into the same trap years later.

Brazil has often been a bellwether of Latin American political currents. It exemplified French-style authoritarian positivism in the early 20th century, centrally planned industrialization in the 1960s and 1970s, and democracy in the 1980s.

(It was not, however, one of the leading nations in the so-called free market reform wave of the 1990s). Lula’s demise is now strengthening the more radical Left, which has been quick to blame what is happening on the President’s “betrayal” of his Marxist origins. The rest of the Latin American Left is watching.

Widespread corruption in underdeveloped countries is a symptom of the cost of the law and the weakness of the legal framework. If laws are burdensome and costly to follow, and there is no reliable system for enforcing contracts, corruption becomes a sort of insurance policy.

As legal scholar Richard Posner has written, “nepotism, clientelism, and bribery become substitutes for contract when the enforcement of contract is undependable”. Over an extended period of time, corruption becomes a culture.

The latest “Doing Business” report by the World Bank shows that an average domestic company with fewer than 100 employees in Brazil would have to pay 148 percent of its annual profits in order to comply with all its taxes. A medium-sized company must spend 2,600 hours just in order to pay them.

It is not surprising that regulations and taxes have taken on a life of their own in Brazil, where the structure of government includes more than 5,500 autonomous municipalities, 10 million civil servants and a multitude of supposedly decentralized but really overlapping layers of bureaucracy competing for a piece of the action.

Although this labyrinth has one positive aspect – it makes centralized decisions difficult to implement – it is totally impractical for reform-minded people.

Lula thought that as long as he kept macroeconomic stability and continued with his “Bolsa Família” program – a conditional cash transfer that gives 50 dollars to each of 7 million families in exchange for making sure their children go to school – “social justice” would flow.

Judging by the lack of investment at all levels of the economy, most Brazilians clearly did not agree. Prosperity requires a massive de-politicization of the prevailing system so that entrepreneurship can flourish. In the absence of that, it is not hard to see why Lula’s government became so corrupt.

Olavo de Carvalho, a Brazilian writer, recently remarked at a conference in Washington DC that “corruption is deeply rooted in the Worker’s Party not as a vulgar way for personal moneymaking but as a technical instrument to erode the moral basis of the capitalistic society and fund the revolutionary strategy”. How ironic that the man who was to save Latin America from old-style socialism is helping revive it.

Alvaro Vargas Llosa is a Senior Fellow and director of The Center on Global Prosperity at the Independent Institute – www.independent.org. He is the author of Liberty for Latin America.

Brazilian stocks rose, ahead of what are expected to be solid fourth-quarter earnings announcements in the coming weeks. Still, investors remained somewhat cautious in anticipation of the release of the minutes from the Brazilian central bank’s most recent monetary policy meeting.

Brazil’s benchmark Bovespa Index strengthened 379.35 points, or 1.59%. Brazilian stocks strengthened, amid gains in the power and metals sectors.

Investors are looking cautiously ahead to minutes from the Brazilian central bank’s latest monetary policy meeting due later in the week. The bank is expected to make hawkish comments regarding inflation and interest rates after tightening monetary policy in January for the fifth straight month.

Still, investors are awaiting fourth-quarter earnings reports in the coming weeks that are anticipated to be generally positive. Brazil’s economy leapt in the second half of 2004, and local firms are now reaping the benefits of that expansion.

Additionally, Brazilian equities were supported by a Standard & Poor’s report that said the country’s macroeconomic prospects for 2005 look “solid.”

Shares of Brazilian electric power utility Copel soared, after the firm announced plans to raise prices by an average of 5% from February 1. The price increase reduces some of the discount awarded to customers that pay their bills on time.

Also, CVRD continued to rise, following its acknowledgement last week that the mining giant is seeking a price hike from clients of up to 90% for iron ore this year.

Iron ore prices are negotiated every year between major producers and their foremost steelmaking clients. Strong Chinese demand has lifted iron ore prices, which surged nearly 19% in 2004 after a 10% rise in 2003.

Thomson Financial Corporate Group
www.thomsonfinancial.com

PRNewswire

Brazil’s National Congress approved December 29 the 2005 Federal Budget, which sets aside resources on the order of US$ 256 billion (R$ 681.3 billion) to pay for the costs of the administrative machine, investments, and debts.

Investments next year should total US$ 7.9 billion (R$ 21 billion). In May the monthly minimum wage will be raised from US$ 98 (R$ 260) to US$ 113 (R$ 300).

The government’s budget proposal, sent to the Congress in August, envisioned investments amounting to US$ 4.3 billion (R$ 11.5 billion). The reporter of the bill, Romero Jucá, raised this total to US$ 7.9 billion (R$ 21 billion).

According to Jucá, this increase was possible due to the “tightening of federal expenditures.” The lawmaker said that the government will have a lot of cash on hand next year, thus permitting an increase in investments.

The 2005 Federal Budget stipulates US$ 1.05 billion (R$ 2.8 billion) in infrastructure investments intended to bring financial returns.

These resources are part of an agreement between the Brazilian government and the International Monetary Fund (IMF), permitting the withdrawal of US$ 3.39 billion (R$ 9 billion) over a three-year period beginning in 2005, to be used to create a primary surplus in infrastructure projects.

In 2005 the first parcel of the US$ 1.05 billion (R$ 2.8 billion) will be passed along to eight projects. Over half – US$ 658 million (R$ 1.745 billion) – will go to highway reconstruction, conservation, and duplication.

The leader of the government in the Congress, Senator Fernando Bezerra (PTB-RN), emphasized that these funds will be essential for the restoration of 14 thousand kilometers of highway.

Translation: David Silberstein
Reporter – Agência Brasil

Growth in the Gross Domestic Product (GDP) for the fifth quarter in a row leads market analysts to estimate a 5.1% increase in the generation of wealth this year in Brazil.

The industrial sector, composed of three groups – manufacturing, construction, and mining -, which registered 6% growth this year, is expected to grow at a slower pace in 2005, an average of 4.5%.

This forecast was made by the president of the National Confederation of Industry (CNI), Federal Deputy Armando Monteiro Neto, at the launching of the document “Brazilian Economy: Performance and Prospects.”

He informed that the slight retraction can be explained by the less favorable situation abroad, as a result of the disequilibrium in the American economy, beset by fiscal and foreign debts, and the adjustment in the pace of external expansion, affected by the monetary policy based on controlling inflation.

Monteiro attributed the good performance of the industrial sector this year to the recovery of domestic consumer demand, due to the control of inflation, salary recovery, and the revival of the job market.

The president of the CNI acknowledged that another important factor in the recovery of industrial sales was the 30% export growth registered this year.

He attributes this result to the flexible exchange policy in recent years, guaranteeing a competitive exchange rate.

Monteiro said that a reduction in exports is foreseeable, but he added that, even so, the country will continue to grow.

“The CNI’s forecasts bet on a 3.5% growth rate, but, in order to continue moving in the direction of economic development, Brazil needs to conclude the tax reform, improve credit conditions, alter the labor laws, and expand investments in the area of infrastructure,” he contended.

Translation: David Silberstein
Agência Brasil

A survey by the Brazil’s CNI (Confederação Nacional das Indústrias””National Industrial Confederation) shows that industrial sector businesses are confident and ready to invest in Brazil next year.

The survey found that 94% of large businesses and 82% of small businesses said they were going to make investments in 2005.

For the sake of comparison, a year ago the numbers were 86% and 80%.

Most of the businesses said they would be investing in machinery and equipment, construction, consultancy and engineering.

The main goal of the investments would be to increase production, improve quality, reduce costs and make it possible to roll out new products.

The single most important obstacle to investments in 2005 cited by 60% of those interviewed would be a drop in demand.

Other possible problems mentioned were a shortfall of funds and uncertainty regarding taxes.

The president of the CNI, Armando Monteiro, declared that Minister of Finance, Antonio Palocci, assured him that the government is studying ways to alleviate the tax burden on financial transactions so as to reduce the cost of capital.

Agência Brasil
Translator: Allen Bennett