1. Brazilian Ministry of Finance 1 Stimulating Growth, What Should Be Done? THE BRAZILIAN CASE BERNARD APPY XXV Meeting of the Latin American Network of Central Banks and Finance Ministries WASHINGTON, MAY 2007

2. Brazilian Ministry of Finance 2 MACROECONOMIC ADJUSTMENT Sources: IBGE, BCB and MDIC.Elaborated by: MF/SPE

3. Brazilian Ministry of Finance 3 IMPACT ON ECONOMIC GROWTH  Better macroeconomic underpinnings set the stage for higher and sustainable growth: External solvency creates conditions for expansion of domestic demand. Economic stability allows consistent reduction of interest rates and expansion of credit. Brazil’s financial structure is undergoing important changes.  The limits for potential output growth of the Brazilian economy are still uncertain today.

4. Brazilian Ministry of Finance 4 CHALLENGES TO EXPAND POTENTIAL GROWTH  Expand the volume of investment in a sustainable way. Special attention to infrastructure.  Increase economic efficiency and productivity. Education. Institutional Reforms.  Ensure increased participation in the international economy without harming future growth.

5. Brazilian Ministry of Finance 5 INVESTMENT AND SAVINGS

6. Brazilian Ministry of Finance 6 GROWTH ACCELERATING PROGRAM (PAC)  Brazil has recently announced an infrastructure investment program for 2007-2010.  Reduction of the public sector’s primary surplus targets (0.45% of GDP).

7. Brazilian Ministry of Finance 7 CHALLENGE: Control Current Expenditures  The Brazilian fiscal structure makes it very difficult to control the public sector’s current expenditures which have been increasing in the last years.  Economic stability and growth of formal employment have contributed positively to the expansion of tax collection despite tax exemption measures.  Recent measures: Cap on Civil Servant expenditure growth Social Security Forum

8. Brazilian Ministry of Finance 8 ECONOMIC EFFICIENCY

9. Brazilian Ministry of Finance 9 EDUCATION  Even tough Brazilian educational inclusion policy is satisfactory, the quality of education is far from ideal.  Recent measures have a positive impact: FUNDEB (National Fund for Basic Education): Extension of previous model (FUNDEF) in order to expand the range of beneficiaries (students from pre-school to high school). Increasing of Federal disbursements. Educational Development Program (PED): Several measures to increase education quality in all its aspects, especially at the basic level.

10. Brazilian Ministry of Finance 10 INSTITUTIONAL REFORMS  Brazil is advancing in the implementation of reforms that increase economic efficiency.  Tax Reform. The reduction of distortions regarding the indirect tax system has positive impacts on investment and productivity.  There are still many issues on the agenda to be settled.

11. Brazilian Ministry of Finance 11 INTERNATIONAL POSITIONING

12. Brazilian Ministry of Finance 12 INDUSTRIAL POLICY ISSUES  The challenge for Brazil and Latin American countries is to take part in the global economy in a way as to encourage innovation and reduce dependency on volatile commodities’ exports.  Even tough the current status is not clear, the “Dutch disease” is a risk that needs to be considered.  The risk of an ill posed industrial policy is the reduction of economic efficiency and the deepening of economic inequality.

13. Brazilian Ministry of Finance 13

14. Brazilian Ministry of Finance 14 INTEREST RATES Sources: BCB, MF/STN and BM&F.Elaborated by: MF/SPE.

15. Brazilian Ministry of Finance 15 CAPITAL MARKET Primary and Secondary Issues (US$ Billions) */ Includes promissory notes, CRIs (real estate receivables certificates), and quotas of credit rights investment funds, among others. **/ Accumulated in 12 months up to April/07. Source: CVM.Elaborated by: MF/SPE.

16. Brazilian Ministry of Finance 16 INVESTMENT (% of GDP) Source:IBGE. Elaborated by: MF/SPE.

17. Brazilian Ministry of Finance 17 FEDERAL REVENUES AND CURRENT EXPENDITURES (% of GDP) Source: MF/STN.Elaborated by: MF/SPE.