Brazil

The
Economic Freedom
Network

Brazil

				Total Government Expenditures
Economic Freedom Rating				As a Percent of GDP


Part 1: The Economic Freedom Ratings for the Components and Various Area and
Summary Indexes: 1975, 1980, 1985, 1990 and 1995.
(The numbers in parentheses indicate the actual values for the components.)

Components of Economic Freedom	1975		1980		1985		1990		1995
I. Money and Inflation	1.3		0.6		0.0		0.0		0.0
(a) Annual Money Growth (last 5 yrs.)	1	(28.9)	1	(41.6)	0	(137.8)	0	(647.7)	0	(1111.6)
(b) Inflation Variablity (last 5 yrs.)	3	(6.9)	1	(16.6)	0	(53.1)	0	(909.8)	0	(996.6)
(c) Ownership of Foreign Currency	0		0		0		0		0
(d) Maint. of Bank Account Abroad	0		0		0		0		0

II. Government Operation	6.0		6.4		3.9		1.9		4.3
(a) Gov't Consump. (% of Total Consump.)	8	(13.8)	9	(11.7)	8	(13.1)	5	(20.1)	5	(19.7)
(b) Government Enterprises	4		4		2		2		4
(c) Price Controls	-		-		-		0		6
(d) Entry Into Business	-		-		-		-		7.5
(e) Legal System	-		-		-		-		0.0
(f) Avoidance of Neg. Interest Rates	-		-		0		0		0

III. Takings	3.9		3.1		2.1		5.8		4.9
(a) Transfers and Subsidies (% of GDP)	-		3	(12.4)	4	(10.0)	4	(10.7)	3	(14.9)
(b) Marginal Tax Rates (Top Rate)	5	(50)	4	(55)	1	(60)	9	(25)	8	(35)
(c) Conscription	0		0		0		0		0

IV. International Sector	2.4		1.7		3.0		2.9		3.9
(a) Taxes on International Trade (Avg.)	5	(5.7)	1	(10.0)	7	(3.2)	6	(3.7)	7	(2.6)
(b) Black Market Exchange Rates (Prem.)	2	(49)	4	(18)	2	(49)	4	(10)	6	(3)
(c) Size of Trade Sector (% of GDP)	2	(9.5)	2	(10.2)	2	(9.7)	0	(6.3)	1	(7.3)
(d) Capital Transactions with Foreigners	0		0		0		0		0

Economic Freedom Rating	3.2		2.7		2.3		3.0		3.7
Ranking of Country	78		95		100		96		98

Part 2: Recent Economic Indicators:
Population 1996:	168.4			Real Per Capita GDP:				1996=	$6,313
(in millions)				(in 1995 U.S. dollars)
Annual Rate of Change (1985-96):	1.4%			Avg. Growth Rate:				1980-90=	-0.3%
								1990-96=	0.8%

Economic Indicators:*	1988	1989	1990	1991	1992	1993	1994	1995	1996
Change in Real GDP: Aggregate	-0.1	3.2	-4.6	0.3	-0.8	4.2	5.7	4.1	3.1
: Per Capita	-1.5	1.8	-6.0	-1.1	-2.2	2.8	4.3	2.7	1.7
Inflation Rate (CPI)	682.3	1287.0	2937.8	440.9	1008.7	2148.4	2668.5	84.4	18.2
Change in Money Supply: (M1)	426.9	1337.0	2333.6	429.4	981.8	2017.8	2098.7	31.2	25.4
: (M2)	1019.3	1462.7	1289.2	633.6	1606.6	2936.6	1146.4	38.9	66.3
Investment/GDP Ratio	22.7	28.6	22.9	19.3	19.5	20.0	20.8	21.6	16.9
Size of Trade Sector (%of GDP)	8.3	6.6	6.3	7.5	8.3	8.7	8.0	7.3	7.1
Total Gov't Exp./GDP Ratio	26.1	28.2	32.9	29.1	33.8	42.1	27.7	30.0	29.0
Central Government Budget
Deficit (-) or Surplus (+)
As a Percent of GDP	-15.2	-16.1	-5.7	-0.4	-3.6	-3.4	-1.1	-5.9	-3.9
Unemployment Rate	3.8	3.3	4.3	4.8	4.5	5.3	5.1	4.6	6.2

* The figures in this table are in percent form.

In 1995, Brazil ranked 98th among the 115 countries in our study. Its economic freedom rating and ranking have been low throughout the last two decades. The reason for Brazil’s low rating is clear—its policies conflict with economic freedom in almost every area. Until very recently, its monetary policy was a disaster, characterized by excessive monetary growth and the consequent hyperinflation. Furthermore, it is illegal to maintain foreign currency bank accounts. Despite some recent privatization, government enterprises are still widespread throughout the economy. The legal system is often ambiguous and it grants a great deal of discretionary authority to government officials. The transfer sector is large, particularly for a country with a low per capita income level. Brazil’s trade policies are highly protectionist—it has the smallest trade sector of any country in our study. Restrictions limiting the mobility of capital are also widespread.

In recent years, there have been some moves toward economic freedom. The top marginal tax rate has been cut. It is now 35%, down from 60% in 1985. Taxes on international trade have also been reduced (from 10.0% in 1980 to 2.6% in 1995). Finally, there is some reason for optimism that Brazil is now willing to break the vicious cycle of monetary expansion and hyperinflation. Restrictive monetary policy during 1995-1996 has reduced the inflation rate to single digits. Credibility is important. If Brazil is going to reap the full benefit of a more stable monetary policy, it would be helpful if the political authorities committed the government to a low and stable rate of inflation. For example, inflation rate targets that held the monetary authorities accountable might be adopted.

As might be expected from its pattern of economic freedom, Brazil’s growth record has been dismal. Its real GDP per capita in 1996 was virtually unchanged from the level of 1980.

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Last Modified: Wednesday, October 20, 1999.