ECONOMIC ANALYSIS DANGER 2/2
THE LIMIT AND DANGER OF CLASSICAL ECONOMIC ANALYSIS THROUGH THE CASE OF BRAZIL 2/2
By Didier BERTIN - 8 March 2010
IV- REFORMS TO FIGHT POVERTY
1-IMMEDIATE END OF SLAVERY
Federal and States Authorities should gather their efforts in association with Police and Army to put a definitive end to Slavery everywhere in Brazil as this phenomenon was above described.
It appears difficult to deal with a country where slavery still exists.
Cancellation of Olympic Games might be envisaged if such situation is not immediately stopped.
2-Taxes – Social contributions and reform of Brazil Organization
The first step to reduce the unbearable disparity between people as reflected by Gini index, is to apply an adequate tax system.
Brazil taxation is heavy according to OCDE, but a lot of taxes are indirect and penalize the poorest people in their ability to survive. On the other hand the wealth tax which was voted has never been applied.
The wealth tax is a direct tax on the high revenues and will have an immediate effect on a better repartition and national consumption could be increase by a good redistribution of the revenue issued from this tax. Of course the conservative OCDE recommends the suppression of this law affecting the interest of rich people. According to them Brazilian Nation should surrender to blackmail of rich people to transfer their money abroad if the law is applied.
Increase of general direct taxation and decrease of indirect taxation will permit to most people to live in better conditions and to boost the consumption.
Reducing the power of States
As for slavery, History is stubborn and States want to defend their privileges at the expenses of the poorest people as in the past Minas Gerais and Sao Paulo did.
The population cannot afford the luxury of an expensive federal organization generating high losses in taxes, projects efficiency and revenue repartition improvement.
a) Tax efficiency
As fairly mentioned by OCDE the tax system is inextricable in Brazil because each State has a strong autonomy in its determination. Taxes are taken by States for the simple transportation of goods from one State to another, as Brazil was not one single Nation. States tend to multiply indirect taxes and affect the purchasing power of people. A single VAT at the scale of the Nation, instead of various indirect State taxes is by far preferable.
Nation is for us Brazil, by opposition to States whose attitude might be predatory as fairly indicated OCDE. States’s autonomy should re-equilibrated in Favor of Federal power.
Wealth tax is not enough and in general direct tax should be increased in a transparent context; this means that Government should take the necessary steps to fight the underground economy, which constitutes a delinquency. Doing so, Federal Government may expect additional resources which should be fairly redistributed in form of job creations, wage increases, and social services.
b) Projects efficiency
In the quest to increase resources of the Nation, the fair application of them is a Government duty but States prerogatives might make difficult the control of fair application and redistribution by lack of visibility in a complex organization.
A substantial part of Federal Budget is earmarked and returns to States and this does not permit an easy application of funds at the Nation scale.
c) Revenues Repartition
Each State is the first beneficiary of its resources and we have thus Rich States and Poor States as Brazil was not a single Nation.
The case of oil is particularly significant. Revenue from oil is concentrated in the state of Rio de Janeiro and in its municipalities, which together accounted for about 45% of royalty and special participation revenue in 2008. Only a small percentage of these revenues “4%” are shared among non-producing states and municipalities through a Special Fund. This fund, the Sovereign Wealth Fund (SWF) only created at end-2008, is an inefficient repartition instrument among other States due to the small take from rich States. This system might destabilize Brazil as one single Nation.
The biggest Reform regarding Justice is to end with a federative system benefiting to a few States as in the time of the Republic of Fazendeiros of 1889 (See my report dated 4 January 2010). The policy of any Government will always be limited by this iniquitous organization.
As Brazil should finish with the Republic of Fazendeiros, it should also finish with slavery and thus divorce clearly with the dark side of its History.
A minimum wage of 200 Euros (510 Reals in 2010) is a formalization of slavery. OCDE finds that slavery is not enough and recommends that users of workers at such levels should pay much less social contribution. Instead of recommending more stringent Government controls, OCDE, recommend again to the Nation to surrender in lowering Social contributions in order that these 200 Euros workers be formally hired. In our opinion law should be respected and delinquents hiring people informally should be punished.
Social contributions of Employers in Brazil are smaller than in European countries but OCDE mentions that they are too high in Brazil for an emerging country, which is discrimination in the value of work per country. European Union shich is a majority partner of OCDE (near 2/3) complains of the too low salaries and social contributions in emerging viewed as unfair treatment of worker but above all as unfair competition on the international market.
OCDE indicates also that Brazilian workers are not enough productive.
A worker may only increase his productivity if corporations make the necessary investments in Equipments to increase production per hour and this also means:
· More competence of Entrepreneurs
· More Investments in equipment able to multiply the productivity of workers
· More permanent education of workers to increase their skills
· More Research and Development- Currently only State makes R&D and not at all companies.
As indicated 19 of the 30 members of OCDE arealso members of EUROPEAN UNION and have signed the Charter of Fundamental Rights, whose principles exclude steps which might endanger people to survive.
Minimum wage should be entirely reviewed to permit each Brazilian citizen to live decently. In order to face their obligations, Brazilian Companies should learn efficiency and competence.
OCDE again severely criticized the Brazilian system and recommend the extension of working period with a postponed departure to retirement. OCDE would like that same criteria of western countries be applied in Brazil and recommend departure to 65 years for men and 60 years for women. OCDE does not take into account the very limited life expectancy in Brazil.
Life expectancy is particularly short for men with 68 years and a departure to retirement at 65 years will mean no retirement. This is particularly inhuman.
Unfortunately Brazilian Government was finally convinced by the conservative arguments since there is a project of law extending pension contribution period and retirement age to 65 years for men and 60 years for women.
We repeat again the 4 principle we have just mentioned
· More competence of Entrepreneurs
· More Investments in equipment
· More permanent education
· More Research and Development
Companies should also work differently to face higher wage and salaries expenses. Production is currently directed to only a part of population with a sufficient purchasing power on a pricing basis impoverishing most of population.
Entrepreneurs seem to keep high margins formal or informal (underground economy). The real economical growth should be based on a mass production with reduced margins, restricted indirect taxation in a context of a real competition aiming to reduce substantially prices. For example, Brazil which is a substantial car maker is not a major world exporter, at very competitive prices taking into account the low staff expenses as China and India start to become.
Workers produce but should not be deprived from the fruit of their work as it is the case now. Entrepreneurs should learn efficiency in their own interest. Secular civism and Ethics should be taught more expansively since Christianity invasive in Brasil does not bring apparently sufficient sense of moral.
V-FEDERATION – WEAKENING THE NATION
A) THE FACTS
Brazil is composed of 26 States and of the federal district of Brasilia whose population of the latter is near 4 million with an area of around 6000 km2.
In fact 3 States out of 26, have the lion’s share with 40% of the population on 10% of the Nation’s area : Rio de Janeiro, Sao Paulo and Minas Gerais.
History is still stubborn since it was influenced by the interests of Sao Paolo and Minas Gerais. The influence of the former “Coffee with milk” Republic is resilient, but the coffee with milk might become difficult to digest with the oil of Rio de Janeiro (see my report dated 4 January 2010).
In adding Bahia and Rio Grande do Sul 5 States represent the MAJORITY of Nation ‘s population on 20% of Brazil’s area.
12 States out of 26 and federal district gather 92% of the Brazilian population on 50% of the country’s area.
Thus 14 States and the federal district i.e. 56% of administrative entities (State and federal district) represent a very negligible part of population. The current Federation is thus a totally unbalanced National organization 11 States (circled in red on the map) form geographically a “homogenous area or country” on southern coast of Atlantic ocean or close of it, with most of the population and richness: from North to south: Pernambouc, Alagoas, Sergipe, Bahia, Espirito Santo, Minas Gerais, Rio de Janeiro, Sao Paulo, Parana, Santa Catarina and Rio Grande do Sul. These 11 States represent 142 million of people i.e. 72% of the Brazilian population on 26% of Brazil (2 212 000 km2). 28% of the population are thus disseminated on 6 300 km2--almost ¾ of the territory.
“In fact, Brazil is more a country of 142 Million people living on 2 212 000 km2, with additional territories of 6 300 000 km2 barely inhabited” than a country of 200 Million inhabitants with an area of 8 500 000 km2.
This does not question the legitimacy of Brazil on all its territories but the useless and expensive federal organization taking into account the development imperatives of the Nation.
The federal organization is clearly damaging Brazilian situation by slowing down development, creating numerous administrative duplications resulting in heavy losses, and maintaining iniquity between States. It aims historically to protect the interest of few powerful States and is a real problem for other states development.
B) THE SYSTEM
The nation lives under the domination of few states and the governing system amplify this discrepancy.
At the executive level, the President chooses the Ministers, may propose laws and may oppose his veto against application of laws. The Federal administration is limited to foreign Affairs, Money, Credits and Defense; meanwhile the States have huge prerogatives.
At the legislative level, the laws are voted by the Congress with a majority of 3/5 (60%) applicable to each of the two legislative bodies.
The congress includes a Senate and a House of Representatives.
Senate represents a shield against strong States with equality of Senators by State: 3 Senators are elected by each State and 3 Senators are elected by the federal district. The total number of Senator is 81.
House of Representatives includes 513 members, 6.3 times the size of Senate. Representatives are proportionally elected and represent thus the strength of States in proportion of their population.
The Senate may appear to have the power of limiting power of the States in proportions of the population, but this security is useless since the States have already huge prerogative by Constitution.
Senate may not counter balance the discrepancy between States since 3/5 of House of representative will be always needed to approve any new law.
States organization increases substantially the cost of the Nation Management since all governing instances are duplicated as e.g. 26 House of Representatives and related Organizations.
This expensive system involves a slowdown for a Population with urgent needs in particular in the poor States and questions the principle of solidarity between entities of one single Nation. In a recent past foreign Nations were obliged to rescue Nordeste from starvation.
This system weakens the federal Government in his effort to organize and harmonize the development of the Nation as a whole. Federal Government seems deprived of control tools to guarantee the optimal applications of resources.
This system does not serve the Nation and its population. Federal organization might be ideal for rich Nations as USA, Germany, Switzerland or Canada and might be detrimental for poor Countries especially if they include unbalanced entities. Central system may permit more efficiency in such context.
VI- CONCLUSION: BRAZILIAN NATION’S DUTIES
1-Lesson for western countries:
Governments in western countries tend to believe the continuous requests from Corporations to limit salaries, taxes and social contributions when they state that they are the source of their economic troubles.
Brazil demonstrated that despite a quasi free workforce, Corporations complain also of the too heavy wages and social contributions. This underlines that these requests are more linked to the absence of Ethics in Corporations and Economic systems in general than to real economic imperatives for survival.
The problem of corporations is also often a matter of lack of managerial competence and greediness regarding profit margins. In Brazil the consequences of it, are high prices and poverty in a context of big discrepancy of revenue repartition.
2-Recommandations to BRAZIL
Brazil is now practically free of the past huge external debt burden, has stabilized its currency and has a positive trade balance. Its balance of payments enabled it to accumulate substantial international Reserves (more than one year of imports). Brazil will probably benefit of additional oil revenues and must start now a real development benefiting to its whole population in line with a more careful respect of Human Rights.
A real substance should be given to GDP in order to be tangible for the whole population.
The European conception of Human Rights is a good guideline since it includes clearly the right of people to welfare. This access to welfare would be eased by a better organization of the current Federation including a stronger federal power.
Brazil means 200 million of people, whose rights are above the prerogatives of the numerous States, which affect the Nation Governance’s efficiency and then the lot of citizens.
The solution to poverty and to its related disorders is not the increase of Police forces as it is projected for Olympic Games security, but the elimination of high poverty.
Brazilian people should not be anymore squeezed between low revenues and high prices.
The Authorities participate to maintain poverty despite few improvements by determining an insufficient minimum wage to survive and by imposing a complex and heavy system of indirect taxes which penalize the poorest people in priority.
Optimal application of resources is a duty of Government in front of the People and the current organization deprives the Federal authority of the necessary tools.
The authority should not listen to corporate requests for reducing social contributions and limiting minimum wage since Capitalism is only an economic process which excludes all moral considerations.
Brazilian corporations benefit of almost free workforce and are not sufficiently competitive as this would be easily achieved by any western company, which make high profits with much higher wages expenses. The reason might originate in a managerial incompetence and in an insufficient reinvestment of too high profit margins.
National authority should control more stringently the level of profit margin, the reinvestment to cover capital expenditures and final prices determination process in a real competitive market. Competition does not seem efficient enough to reduce prices.
Size of local corporations should increase in line with country. This policy may be expected from a renovated powerful executive federal authority, which should also make necessary steps to finish with the underground economy.
Substantial increase of minimum wage and higher “DIRECT” taxation should be applied to reduce the Gini Index to a decent level. Authorities should not surrender in front of blackmail of Rich people who may threaten to transfer their money abroad.
Low level of wage which does not permit survival could be named “Slavery”. On top of this legal slavery, the real slavery still exists in Brazil: 6 000 slaves were freed by the Police in 2007. Slavery is in the roots of Brazil and it is time to clean this dark aspect of Historical traditions.
Poverty and Favelas are everywhere in Brazil and generate insecurity which is also a signal for an urgent solution. Brazil ranks number 3 in the world for criminality with 55 000 murders per annum. This affects also Tourism, which might be a much bigger resource for Brazil, when foreign countries will stop to feel oblige to discourage their citizens to travel to Brazil.