2009 Index of Economic Freedom

Quick Facts

Population:

• 189.3 million

GDP (PPP):

• $1.7 trillion
• 3.8% growth
• 3.3% 5-year compound annual growth
• $8949 per capita

Unemployment:

• 9.3%

Inflation (CPI):

• 3.6%

FDI Inflow:

• $18.8 billion

Brazil's economic freedom score is 56.7, making its economy the 105th freest in the 2009 Index. Its modest gain in financial freedom was largely offset by poorer government spending and fiscal freedom scores. Brazil is ranked 21st out of 29 countries in the South and Central America/Caribbean region, and its overall score is well below the regional average.

Brazil is a regional economic power and has achieved moderate but stable economic growth. Lower inflation has contributed to macroeconomic stability, and high commodity prices have helped export performance. Bank credit has continued to grow as well.

However, the state presence remains heavy in many areas of the economy. The efficiency and overall quality of government services remain poor despite high government spending as a percentage of GDP. The overall tax burden is high in comparison to other developing countries. The high cost of credit and frequent regulatory changes impede private investment. Regulatory inflexibility makes starting a business take much longer than the world average. The judicial system and other areas of the public sector are inefficient and vulnerable to corruption.

Background Back to the top

Brazil, the world's fifth-largest country, is dominated by the Amazon River basin and the world's largest rain forest. The population of almost 200 million is heavily concentrated on the coast, where a dozen major metropolitan areas with populations of a million or more offer direct access to the Atlantic Ocean. The current democratic constitution dates from 1988. Workers' Party President Luiz Inacio "Lula" da Silva was elected in 2002 and re-elected in 2006, and though his rhetoric is socialist, he is pragmatic and pays attention to fiscal and monetary funda-mentals. A strong currency regime has contributed to rising living standards, and Brazil has a growing middle class. Agriculture/agribusiness and industry account for 25 percent and 33 percent, respectively, of GDP. Brazil has benefited from surging prices for its booming exports of commodities.

Business Freedom 54.4 Back to the top

The overall freedom to start, operate, and close a business is limited by Brazil's regulatory environment. Starting a business takes about four times the world average of 38 days, and obtaining a business license takes more than the global average of 225 days. Closing a business is difficult.

Trade Freedom 71.6 Back to the top

Brazil's weighted average tariff rate was 6.7 percent in 2006. Import bans and restrictions, market access barriers in services, prohibitive tariffs, border taxes and fees, restrictive regulatory and licensing rules, export support programs, non-transparent government procurement, and problematic protection of intellectual property rights persist. Fifteen points were deducted from Brazil's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 65.8 Back to the top

Brazil's top income tax rate is 27.5 percent. The standard corporate tax rate is 15 percent, but a surtax of 10 percent and a 9 percent social contribution on net profit paid by most industries bring the effective rate to 34 percent. In December 2007, the legislature vetoed a bill that would have renewed the financial transactions tax. In the most recent year, overall tax revenue as a percentage of GDP was 38.8 percent.

Government Size 50.3 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 40.7 percent of GDP. Public debt is still around 50 percent of GDP. Besides debt service, government spending is focused mainly on pensions, transfers to local governments, and bureaucracy.

Monetary Freedom77.2 Back to the top

Inflation has been better controlled in recent years, averaging 4.1 percent between 2005 and 2007. Although such public services as railways, telecommunications, and electricity have been privatized, regulatory agencies oversee prices. The National Petroleum Agency fixes the wholesale price of fuel, and the government controls airfare prices. Ten points were deducted from Brazil's monetary freedom score to adjust for price controls.

Investment Freedom50.0 Back to the top

Foreign investors are granted national treatment. Foreign investment is restricted in nuclear energy, health services, media, rural and border property, fishing, mail and telegraph services, aviation, and aerospace. In firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll. Foreign specialists in fields where Brazilians are unavailable are not counted in calculating the one-third permitted for non-Brazilians. Bureaucracy and administration are non-transparent, complex, and subject to corruption. There are few restrictions on foreign exchange transactions. Foreign investors, upon registering their investment with the central bank, may remit dividends, capital (including capital gains), and royalties. The central bank approves outward direct investment in some cases, including transfers and remittances, where it has broad administrative discretion. Foreign investors may own real estate but must obtain specific authorization to purchase land along the country's borders.

Financial Freedom50.0 Back to the top

Brazil's financial system is South America's largest and one of the largest among all emerging markets. Despite lingering state involvement, banking and capital markets are increasingly diversified, dynamic, and competitive. Domestic banks lead the industry, but foreign banks are gaining more presence. About 200 public and private commercial banks and many non-banking financial institutions conform to international best practices. Bank credit has continued to expand. The insurance market, while growing, remains fairly small. The stock market is not a major source of domestic corporate finance but there were 64 new IPOs in 2007, a noticeable increase from only seven in 2004.

Property Rights50.0 Back to the top

Contracts are generally considered secure, but Brazil's judiciary is inefficient, subject to political and economic influence, and lacking in resources and staff training. Decisions can take years, and decisions of the Supreme Federal Tribunal are not automatically binding on lower courts. Protection of intellectual property rights has improved, but piracy of copyrighted material persists.

Freedom From Corruption35.0 Back to the top

Corruption is perceived as significant. Brazil ranks 72nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Businesses bidding on government procurement contracts can encounter corruption, which is also a problem in the lower courts.

Labor Freedom62.7 Back to the top

Brazil's inflexible labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee can be costly. Benefits mandated by rigid labor legislation amplify overall labor costs. The high cost of laying off a worker creates a disincentive for companies that would otherwise hire more people.