57495 A u g u s t 2 0 10 Wo r l d B a n k Quarterly Knowledge Report INTERVIEW S O C I A L A S S I S TA N C E A N D S H O C K S : 10 BNDESs Fernando Puga, on Brazils THE FOOD CRISIS AND CCTS long term credit By Anna Fruttero market. F or a long time, Brazil was been known as a country with persistent INSIDE THIS ISSUE poverty and high inequal- ity. In the last few decades, Editorial 1 however, the country`s substantial social invest- Food Crisis 1 ments have proven effi- cient, effective, and well Entrepreneurship 2 targeted, and results are plain to see. The efforts to Savings and Poverty 7 address the structural causes of poverty started Pre-Sal 8 in 1995, with municipal Fernando Puga 10 conditional cash transfer (CCT) programs, which led Public Investment 12 to the creation of several the poor/vulnerable popu- the strong performance in national CCT programs in lation. poverty reduction, but also Public Management 14 the early 2000s. as a useful instrument to Bolsa Família represented mitigate the effects of In 2003, the Brazilian Gov- a new multidimensional Low Carbon 15 strategy to reduce poverty some types of shocks. ernment merged four exist- ing federal CCT programs and inequality. The pro- This article highlights some Time to Travel 18 gram has achieved impres- results of an on-going re- into Bolsa Família, and in 20 January 2004 it created sive results while using a search on the distribu- In the Loop very limited amount of re- tional effect of shocks and the Ministry of Social De- velopment (MDS), to inte- sources, only 0.35 percent the mitigating role of social grate non-contributive so- of GDP. This investment protection programs1. Us- KEY DATES has contributed not only to cial protection policies for (Continued on page 2) · Presidential and State Elections--October 3 · World Development Re- port Consultations-- A CRITICAL JUNCTURE Brasília, August 30-31 EDITORIAL BY MAKHTAR DIOP · LAC Flagship global launch --São Paulo, Sep- tember 13 C ome October 3rd, Brazil will hold general elec- tions. We hope that some of focused on critical issues for Brazil`s future. A few of these are summarized in this issue out of poverty. The question Anna Fruttero raises in her thought-provoking piece is · Brazil Knowledge Day -- the Bank`s studies could in- of the Quarterly Knowledge whether and to which extent Washington, December 2 form the debate. From social Report, and more will be fea- the increase in Bolsa security to sustainable devel- tured in the coming editions. Família`s benefits in 2008 · Brazil Knowledge Day-- opment, the Bank is produc- may have mitigated the Brasília, December 14 ing a record number of ana- Brazil`s flagship Bolsa Família losses due to food prices in- lytical reports, all of which CCT program helped millions (Continued on page 20 ) Printed on recycled paper Page 2 A u g u s t 2 0 10 FOOD CRISIS AND CCTS... (CONTINUED FROM PAGE 1) ing monthly consumer expansion. Dairy prices goods. Except for food, prices for 16 different food rose by 90 percent, maize prices remained constant items, collected in the by 80 percent, wheat by at around 5 percent or main 11 metropolitan ar- 70 percent, rice by 25 per- lower. Food prices, on the eas of Brazil, we estimated cent2. Increases of this other hand, peaked in July first-order welfare impacts magnitude and over such a 2008, expanding by about of food price rises ob- short period were unprece- 20 percent (with prices for served during 2008, on dented for basic food- cereal hitting 80 percent "Our analysis the basis of detailed pre- stuffs, and led to wide- and meat 40 percent). shock household con- suggests that these spread concern about their sumption patterns (POF Our analysis suggests that impacts on hunger and increases in food 2002/03), across the ex- these increases in food poverty. A number of gov- penditure distribution. We prices were markedly re- prices were markedly then used the Brazil`s ernments resorted to ex- gressive4, with the bottom port restrictions in order to regressive, with the 2006 National Household income percentiles of the guarantee domestic sup- Sample Survey (PNAD) to population experiencing a bottom income estimate the effect of in- ply, while international much higher reduction in organizations3 fretted percentiles of the creases in the values of about possible reversals welfare than the top per- the benefits of the two centiles. This average population main income transfer pro- and delays in meeting the regressive incidence Millennium Development experiencing a much grams, Bolsa Família and Goals. reflects substantial Benefício de Prestação differences across food higher reduction in Continuada (BPC), which While maintaining rela- items, in terms of average welfare than the top occurred during the first tively low levels, inflation in price increase and of the half of 2008. Brazil increased in early relevance of each item in percentiles" 2007, driven mainly by Between 2005 and 2008, total consumption. food prices, and reached a world prices of many sta- During the first half of peak of about 7 percent in ple food commodities rose 2008 the Government of June 2008. However, there substantially, driven by Brazil increased the value were marked differences rapidly rising demand dur- of benefits for Bolsa across categories of ing the global economic Família and BPC, which is tied to the minimum wage5. In our analysis, we Figure 1--Price-Increase Incidence Curves Under Different Scenarios investigate the extent to which these measures might have mitigated the welfare losses due to the price increases. To gauge the differential effect of the price changes across the income distribution and the effect of the differ- ent policies, we define price-increase incidence curves that show how the change in consumption for a given percentile varies across percentiles ranked by income. In Figure 1, we can see the price-increase incidence curves for the changes in prices (black bold line), for the changes Qua r te r l y K n o w l e d g e R e po r t Page 3 the poorest 20 percent in 2006. Moreover, Bolsa Família is not a counter- cyclical instrument and its targeting mechanism is not necessarily appropri- ate to identify those hit by a shock, in particular the new poor. Another issue is that, when facing a transi- tory shock, the policy should be transitory as well. However, the politi- cal economy of increasing benefits temporarily is Ms. Juraci Santana de Brito, 48, shows her benefit card in Acauã, Piauí. challenging Photo by Benonias Cardoso in prices and in the value very few of the BPC benefi- 1. Ferreira, F.H.G., A. Fruttero, P. Leite, and L. Lucchetti (2010) of Bolsa Família benefits ciaries remain in the low- "The welfare impact of the 2008 (grey thin line), and for est percentiles of the in- Food Price Shock in Brazil", work "Benefit increases in change in prices and in the come distribution, while in progress, World Bank. value of BPC benefits most of Bolsa Família 2. Ivanic, M. and W. Martin Bolsa Família and (broken line). beneficiaries are still poor. (2008), Implications of Higher BPC may have The limited overall impact Global Food Prices for Poverty in The analysis suggests that Low-Income Countries, World mitigated the welfare can be explained by the the benefit increases in Bank Policy Research Working limited size of the transfer Paper 4594 losses among the Bolsa Família and BPC may have mitigated the relative to the welfare loss. 3. FAO (http://www.fao.org/ extremely poor, but welfare losses among the While Bolsa Família and newsroom/en/ extremely poor, but did not BPC are programs de- news/2008/1000923/), MDG did not have had Report 2008 have had much protective signed to address struc- much protective impact among the moder- tural poverty, they can be 4. It does not account for income ate poor, or elsewhere used by the Government in effects of price changes. We are impact among the currently working on estimating along the distribution, thus response to shocks. Bolsa these effects. moderate poor" having no effect on aggre- Família, with its good tar- 5. The value of the basic benefit gate measures of poverty geting performance and of Bolsa Família increased by 8 and inequality. Moreover, it high coverage level, can percent (R$4), the value of the is evident that most of the provide a relatively inex- benefit per child by 13 percent (R$2) while BPC benefits in- effect is due to Bolsa pensive way to transfer creased by almost 9.2 percent Família. This can be ex- resources promptly to a (R$35). To cost of each of these plained by the different large number of the needi- two measures is very similar coverage of the two pro- est families. On the other because of the much higher grams and the level of the hand, despite good target- number of beneficiaries of Bolsa Família compared to BPC. benefits. While both pro- ing, a large share of BPC grams are well targeted, beneficiaries is not among 6. Bolsa Família benefits are directed families with young Bolsa Família has almost 4 the poorest because of the children and are meant to com- times as many beneficiary much higher level of the plement family income. BPC households as BPC (12.4 value of the transfer. benefits on the other hand are vs. 3.4 million in 2009) but directed to elderly or disabled Some caveats are needed. and hence are meant to guaran- a benefit level that is tee a minimum level of income to Despite good targeting, about one third of that of meet basic needs. many poor families are not BPC, which is equivalent of Bolsa Família beneficiar- one minimum wage6. Thus, ies: about 45 percent of Page 4 A u g u s t 2 0 10 BOLSA FAMÍLIA AND ENTREPRENEURSHIP Photo by Luana Maria By Guilherme Lichand relief but does not provide poor families. Results from the means for breaking away other programs, such as Pro- C onditional cash-transfer programs (CCTs) have had a significant effect on from poverty. These concerns would be reduced if the pro- campo, also in Mexico, and a microfinance experiment in gram has a positive effect on India, also point towards a poverty and inequality reduc- positive effect of the trans- entrepreneurship. tion in developing countries fers on potentially wealth- over the last decades. In Bolsa Família provides gov- constrained families starting particular, Brazil`s CCT pro- ernmental transfers to a business. gram Bolsa Família, along households up to a certain with other Governmental income threshold and with Along similar lines, we assess transfers, is credited for as children or pregnant women, whether Bolsa Família in- much as 50 percent of the as long as they meet some creases the probability of recent fall in inequality in requirements related to in- starting a new venture in Brazil (the Gini index de- vestments in children`s edu- Brazil, decomposing its po- creased from 0.5957 in cation and/or health. Cre- tential effects into three 2001 to 0.5431 in 2009, ated in 2003, the program is channels: (i) alleviation of according to CPS/FGV). Gov- designed to reach the poor- wealth constraints, (ii) insur- ernment support of income- est families in the country, ance against bad outcomes generating activities among and has displayed targeting of risky activities, and (iii) poor individuals is seen as and coverage performance reduction in child labor such an important policy above any national program (through the effect of the area that IPEA researcher and in line with best interna- conditionality). Ricardo Paes de Barros calls tional practices. it the next generation of so- If startup costs are substan- cial protection policies in A large literature documents tial, and if poor individuals Brazil. However, potential how CCTs affect individual have limited access to credit, "Whether the program decisions. Bolsa Família has channel (i) is expected to effects of the program on incentives the poor to entrepreneurship have not been shown to improve increase entrepreneurship, school attendance and de- since wealth-constrained start their own yet been assessed. crease child labor but to have individuals could use the Whether the program incen- no impact either on the par- cash transfer to start a new businesses is relevant tives poor individuals to start ents` labor supply or on fertil- venture or to increase the in light of the claim their own businesses is par- ity decisions. On entrepre- scale of their pre-existing ticularly relevant in light of neurship, it has already been firm. Channel (ii) is also ex- that Bolsa Família the claim ­ common to all shown that Mexico`s Opor- pected to increase entrepre- does not provide the CCTs ­ that Bolsa Família tunidades increases the in- neurship if household heads deals with short-term poverty come-generating potential of are risk-averse: since they means for breaking away from poverty" Table 1--Main occupation (urban sub-sample) Wealth constraint alleviation (IV) Insurance (OLS) (1) (2) (3) (1) (2) (3) Entrepreneur Employer Self-employed Entrepreneur Employer Self-employed 0.00435 -0.00532*** 0.00967* 0.00689 -0.00517*** 0.0121** Bolsa Família (0.0055) (0.0017) (0.0054) (0.0055) (0.0017) (0.0054) -0.00719 -0.00433** -0.00286 -0.00526 -0.00421** -0.00105 Other Transfers (0.0058) (0.0018) (0.0057) (0.0058) (0.0018) (0.0057) Individual controls Yes Yes Yes Yes Yes Yes Year fixed-effects Yes Yes Yes Yes Yes Yes UF fixed-effects Yes Yes Yes Yes Yes Yes Observations 49,588 49,588 49,588 49,588 49,588 49,588 R-squared 0.06 0.024 0.056 0.06 0.024 0.057 Tables 1 & 2: standard errors in parentheses --*** p<0.01, ** p<0.05, * p<0.1 Qua r te r l y K n o w l e d g e R e po r t Page 5 Table 2 -- All sources of income (urban sub-sample) Wealth constraint alleviation (IV) Insurance (OLS) (1) (2) (3) (1) (2) (3) Entrepreneur Employer Self-employed Entrepreneur Employer Self-employed 0.00319** -0.000158 0.00334*** 0/00307** -0.00017 0.00324*** Bolsa Família (0.0013) (0.0003) (0.0012) (0.0013) (0.0003) (0.0012) 0.00400*** -0.000098 0.00410*** 0.00391*** -0.000107 0.00402*** Other Transfers (0.0013) (0.0003) (0.0013) (0.0013) (0.0003) (0.0013) Individual controls Yes Yes Yes Yes Yes Yes Year fixed-effects Yes Yes Yes Yes Yes Yes UF fixed-effects Yes Yes Yes Yes Yes Yes Observations 49,588 49,588 49,588 49,588 49,588 49,588 R-squared 0.006 0.004 0.005 0.006 0.004 0.005 are guaranteed to receive the dren for the third channel, use the cash transfer to di- transfer irrespective of what since it has been docu- versify their income portfolio; happens with their business1 mented that the condition- this can also be regarded as (from success to bankruptcy), ality is only binding for boys positive effect of the pro- "Entrepreneurship is individuals could be more regarding labor supply2.3 gram, potentially enhancing willing to engage in risky ac- Therefore, if the effect of the ability of the poor to pro- indeed stimulated by tivities. Assuming that chil- Bolsa Família on entrepre- tect against adverse eco- dren always work with their neurship is conditional on a nomic shocks. Also of inter- the program, but only parents (in their parents` firm child`s gender, then the con- est is the fact that Bolsa in urban areas. Social whenever they are business ditionality has a level effect. Família is different from owners), channel (iii) could other transfers in terms of conditionalities do not decrease entrepreneurship if Tables 1 and 2 present our providing insurance, given the conditionality decreases main results. Entrepreneur- that the cash transfer repre- impact the level of ship (defined as owning a children`s labor supply and if business as an employer or sents, in some cases, a large entrepreneurship" children were more produc- share of household income4. tive inside` the firm ­ by self-employed) is indeed making entrepreneurship stimulated by the program, Alternative explanations for more attractive to household but only in urban areas, these effects, such as the heads as opposed to supply- through the insurance and fact that enrolled individuals ing labor along with their wealth constraint alleviation might also have higher social children. It is important to effects. However, new ven- capital, or a higher unob- note that this would not be a tures are typically secondary served propensity to entre- sources of income. Condition- preneurship, seem to be negative result, per se. alities do not impact the level dismissed by a composition We draw upon Brazil`s Na- of entrepreneurship. When effect: the increased propen- tional Household Sample referenced by home owner- sity to start a venture comes Surveys (PNADs) of 2004 ship, the program is docu- entirely from self- and 2006, which are the only mented to have a smaller employment, while there years for which transfer impact among those house- seems to be some transition- beneficiaries were identified. hold heads who own their ing from employers to self- The empirical strategy used homes ­ reinforcing the in- employment. Whether this to separate the effects of terpretation of alleviation of points to the effect of the interest is comparing indi- wealth constraint ­; however, binding conditionality ­ viduals based upon their this effect is not statistically through parents relieving wealth prior to the transfer significant, probably because their children from working in for the first channel; upon the survey`s question is not the family firm in order to their wealth after the transfer really about tenure. attend school ­, or to misre- for the second channel, and porting of parents ­ afraid of upon the gender of their chil- Recipient household heads losing benefits on account of Page 6 A u g u s t 2 0 10 BOLSA FAMÍLIA AND ENTREPRENEURSHIP... keeping their children in the ondary sources of income, a higher propensity towards business ­ is not relevant for we see that they are mainly entrepreneurial activities) our analysis: what matters is involved in small scale com- does not exist in context of that higher social capital or a merce and service ventures, the program`s conditionality higher unobserved propen- activities that are better sity to start a venture cannot suited to urban markets and, account for this effect. hence, might involve lower startup costs when com- 1. Unless firm's profits were The previous findings allow pared to those in rural envi- so high as to eliminate house- us to conclude that Bolsa hold eligibility to the program, ronments. Família stimulates self- a situation that we rule out "Bolsa Família employment. If this is re- It is also worth remarking without great loss of general- stimulates self- garded as a higher- that, within the subset of ity. productivity activity, then we enterprising parents ana- 2. Cardoso, Eliana and employment and could conclude that the pro- lyzed, we do not find any SOUZA, André P. (2004) "The gram might have positive negative effect of the pro- impact of cash transfers on might have positive long-term effects on growth gram on entrepreneurship child labor and school atten- long-term effects on in addition to short-term pov- due to the conditionality (be dance in Brazil" documents erty relief and better protec- it because children`s produc- this effect for Bolsa-Escola. growth in addition to tion against shocks, on ac- tivity is not indeed higher 3. Ex-post wealth differs from short-term poverty count of enhanced diversifi- inside` the firm or because ex-ante wealth by revenues cation of the household in- children actually do not stop from interest, financial appli- relief and better come portfolio. The pro- working in their parents` ven- cations and other sources of gram`s effects on individual`s ture) ­; had we found a nega- income (this is the best PNAD protection against occupational choices are tive effect, it might have had allow us to do). shocks" concentrated in urban areas, implications for CCT bundle`s 4. Calculations indicate that precisely where Bolsa Família redesign if Government de- Bolsa Família represents is assumed to have weaker cided that this kind of occu- about 10 percent of recipi- potential to support individu- pational choice should be ent's average household in- als out of poverty through more strongly discouraged by come, and up to 50 percent of first-order` effects, that is, by the program. It turns out that the average income of lowest allowing increased access to this short-term vs. long-term decile recipient households. basic services and goods5. productivity trade-off (since 5. How to get children out of When we investigate the enrolled children are more jobs and into school", The activity composition for self- likely to end as more edu- Economist, July, 29th, 2010 employed individuals in sec- cated grownups, hence with S AV I N G S , P O V E R T Y AND LIFECYCL E IN BRAZIL By Romero Rocha from 6.5 percent to 7.2 changes in consumption/ percent in the same pe- saving life cycle. The Brazilian Institute of riod. An interesting of the Geography and Statistics Figure 1 (saving rates by survey is that families are (IBGE) released last June income percentile for saving more (or dissaving its household expenditure 2002 and 2008) shows less) in 2008 compared survey (POF) 2008, which to 2002. In 2008, 41 per- that poor families have shows how the Brazilian cent of Brazilian house- saved more in 2008 than society evolved in the pre- holds had negative sav- in 2002. Moreover, while vious five years. While ings, 8 percentage points household expenditures in 2002 positive house- above 2002. This article on education fell from 4.1 hold savings started at investigates what lies be- percent in 2002 to 3.0 the 74th percentile, in hind this change in Brazil- percent in 2008, health ian household saving pat- 2008 it started at the expenditures increased terns and analyzes 61th percentile. Qua r te r l y K n o w l e d g e R e po r t Page 7 To better understand the Figure 1--Saving Rates, by Income Percentile, 2002 and 2008 determinants of this change in saving patterns, we draw a similar graph, but using income in abso- lute terms to compare sav- ing rates. Thus, in Figure 2 we plot the saving rate for every household with per capita income below USD 1,000.00, Purchasing Power Parity (PPP) ­ cover- ing 80 percent of the popu- lation. The main insight from this figure is that a the future, and thus to ranted. Indeed, it would be large part of the increase save more. important to ascertain in savings for low percen- tile is the result of an in- Another interesting point whether the differential crease in income of the that the survey allows us effect of transfers and la- poor. The main driver of to analyze is whether labor bor income on saving re- the increase in household income and cash transfers flects behavioral differ- saving rates is the de- affect the saving rate in ences or just the fact that "The main driver of crease in the inequality of cash transfer programs Brazilian income distribu- the same way. In order to the increase in shed some light on this benefit the poorest, who tion which occurred be- have a smaller marginal household saving tween 2002 and 2008. We important question we ran also see an increase in a regression of saving propensity to save than rates is the decrease in savings for a given income rates on labor income and those who are better off the inequality of per capita (the line for income from transfers, 2008 is still above the line Brazilian income using household expendi- for 2002 in Figure 2). Table 1--Regression of Saving distribution which While further research is ture surveys of 2002 and Rates on Labor Income and necessary to explain this 2008. As presented on Transfers occurred between fact, one of the possible Table 1, our main result is 0.272*** 2002 and 2008" explanations is that the that a labor income in- Log labor income (0.011) more stable economy may crease fosters a larger induce people to plan for increase in household sav- 0.198*** Log transfers Figure 2--Savings by Income per Capita ing rates than (0.008) an equal in- Observations 33,393 crease in cash R-squared 0.13 transfer in- Robust standard errors in paren- come. This is thesis. an interesting * significant at 10 percent; finding with ** significant at 5 percent; *** significant at 1 percent potential policy implications. However, be- fore jumping to conclusions, further re- search is war- Page 8 A u g u s t 2 0 10 THE BRAZILIAN ECONOMY AND T H E A DV E N T O F P R E - S A L By Marcio Gold Firmo oil reserves, including fields oil production forecasts for whose volume is yet to be 2020 and the U.S. Energy D espite the abundance of its natural re- sources and in contrast assessed, are expected to range from 35 to 85 bboe, Information Administration (EIA) oil production and oil boosting the country´s total prices forecasts for 2020 with several countries of reserves by 280 percent to and 2035 are summarized Latin America, Brazil has 670 percent, to between in Table 1, which shows an managed to build a diversi- 50 and 100 bboe. As a upward trend in the value fied economy since its in- result, Brazil would jump of oil production. Depend- dustrialization back in the from 16th to 8th largest ing on the assumptions 1940`s. However, the re- proven oil and natural re- made for future oil prices cent discovery of huge oil serves. and production, this value reserves off the Brazilian could reach between US$ coast, in ultra-deep waters As large as the Pre-Sal dis- 130 billion and US$ 201 below a thick salt layer, has coveries might be, they billion per year in 2020, been object of intense de- would not imply significant according to Petrobras` bate. On the one hand, this changes in the world oil production forecasts, the indubitably opens a new market, as current proven equivalent to 5.2 to 8.1 horizon for the country`s oil reserves add up to percent of 2020 GDP. Ac- development, but, on he 1,300 bboe. Furthermore, cording to EIA`s projections other, it raises concerns the broader concept of (which are more conserva- about costs and benefits of possible reserves points tive than Petrobras` for the becoming a large oil ex- out to much larger figures. year 2020, as one can see porter. A new regulatory While not capable of influ- in the table), the value of framework is being de- encing international prices, projected oil production bated by the Brazilian Con- the Pre-Sal discovery will could reach up to US$ 150 gress to deal with the new most probably have a pro- "By 2035, Brazils oil billion by 2020 and US$ wealth. found impact in the Brazil- 282 billion by 2035, ac- production could be ian economy, its future The Pre-Sal reserves will counting for up to about 6 dynamics, and the policy equal to half of todays significantly change Bra- percent of Brazilian GDP. challenges it will face in the zil´s international profile in agriculture GDP, one next decades. These numbers mean that the petroleum sector. Con- oil production would be fifth of manufacturing firmed recoverable volume A glimpse of this can be equal to half of today`s agri- of oil stands at between 15 had through rough esti- GDP, or twice the size culture GDP, one fifth of and 21 billion of barrels of mates of the value of future manufacturing GDP, or of the Brazilian car oil equivalent (bboe), in five oil production. Currently, twice the size of the Brazil- different fields along the the Brazilian annual oil industry" ian car industry. Although southeastern coast. An production is around 2.5 impressive, by 2020 and additional field could hold million boe per day, which under the most conserva- between 7 and 10 bboe, accounts for US$ 73 billion tive assumptions for oil which, if confirmed, could or 4.5 percent of Brazil`s prices and production, the be the largest discovery in GDP at current oil prices share of oil in GDP would the last 30 years. Pre-Sal (US$ 80/barrel). Petrobras` Table 1--Oil Production Value in Terms of GDP Petrobras Forecasts EIA Production Forecasts Year 2020 2020 2035 Oil production (million boe/d) 5.1 5.1 3.8 3.8 5.8 5.8 5.9 Oil price (US$/barrel) 70 108 70 108 70 108 133 Production value (million US$) 130,305 201,042 97,090 149,796 148,190 228,636 281,561 Value over GDP 5.2% 8.1% 3.9% 6.0% 3.1% 4.8% 5.9% Source: Own elaboration, Petrobras, EIA--A 4.5% annual GDP growth is projected. Qua r te r l y K n o w l e d g e R e po r t Page 9 still be considerably below also have a major impact operator for new Pre-Sal that of countries like Rus- on Brazilian foreign ac- exploration consortiums, sia, Venezuela, and even counts. In the first phase of with at least 30 percent of Mexico, Canada and Co- exploration, the investment the capital ­ a requirement lombia. However, the share needed will have to be fi- that significantly raises of oil in Brazil`s exports nanced abroad, raising Petrobras` capital needs. could become similar to Brazil`s current account Hence, another draft bill those of Mexico and Colom- deficit. But, as production has been proposed, regu- bia, and be higher than takes off and exports rise lating the capitalization of "Pre-Sal exploration Canada`s. significantly, this deficit is Petrobras in an operation should have a major expected to narrow and called costly cession: the Because the Pre-Sal oil impact on Brazilian eventually turn into a sur- Federal Government will in fields lie in ultra-deep wa- plus. Therefore, if internal practice exchange the prop- foreign accounts, But, ters, Pre-Sal extraction drill- savings rates remain con- erty rights of up to five bil- ing investment costs esti- as production takes stant, a high investment­ lion boe for a number of mates are around US$ 45/ high deficit scenario could Petrobras` shares. The off and exports rise barrel, five times higher develop in the following price Petrobras will pay for than in traditional oil fields. significantly, this years. these five billion boe will be Even so, it seems unlikely defined by an independent deficit is expected to that oil prices in the next The rise in production could appraisal conducted by decades decline enough to push tax collection up. narrow and eventually international firms, and threaten profitability. Actu- However, it is probably pre- further revised after better turn into a surplus" ally, the large amount of mature to forecast future knowledge of the explora- investment needed may oil revenues, as Congress is tion costs is obtained, so have positive reflections on still discussing the new that neither Petrobras nor the Brazilian economy: in regulatory framework and the Government profit from its 2010-2014 Business how to distribute royalties Plan, Petrobras plans to and fees among Federal, the costly cession. invest US$ 212 billion in State and Municipal gov- Finally, it is yet uncertain the country over the next ernments. In particular, the how Congress will settle the five years, US$ 33 billion of Federal Government has dispute among states and which in Pre-Sal develop- announced its intention to municipalities over future ment and exploration. Be- have tighter controls over Pre-Sal oil revenues. Fol- tween 2014 and 2020, the oil production and exports lowing the current rules, 60 company expects to invest and to raise its share on oil percent of revenues of roy- US$ 70 billion in Pre-Sal. profits. A draft bill was sent alties and special participa- "The large amount of Total investment in the to Congress regulating a tion fees are distributed investment needed to economy related to Pre-Sal new exploration model in among subnational enti- could be considerably Pre-Sal fields and strategic ties, but there is a high develop Pre-Sal may higher: market expecta- areas, in which the com- degree of concentration of have positive tions range from US$ 480 pany awarded the right to these revenues going to the billion to US$ 1 trillion up to explore an oil field ulti- producing states and mu- reflections on the 2027. With a GDP of mately produces as agreed nicipalities and their Brazilian economy" around US$ 1.6 trillion, with the Government, using neighbors. For instance, investment-to-GDP expan- a part of its output to re- Rio de Janeiro state and sion led by oil extraction cover capital and opera- municipalities hold 75 per- could reach between 1.5 tional expenditures; the cent of these royalties and percent and 3 percent over remainder (minus paid roy- fees. The proposed the next 20 years. This alties), the so-called "profit changes discussed in Con- would significantly add to oil", is then split between gress could substantially Brazil`s struggle to increase the Government and the alter this framework, al- investment rates, currently company, typically at a 80 though the outcome of the around 19 percent of the percent-20 percent rate. discussions is still highly GDP. According to the project, uncertain Pre-Sal exploration should Petrobras is the mandated Page 10 A u g u s t 2 0 10 A GREENFIELD MOMENT FOR INVESTMENT IN BRAZIL By Denise Marinho, vestment is in- Jivago Ximenes and creasing, but its Marcio Firmo profile is also changing. Until A s the head of the Eco- nomic Research Depart- ment of the Brazilian Na- recently, it was focused in mod- ernization, as tional Development Bank companies re- BNDES, the economist Fer- "Investments are nando Pimentel Puga man- placed old ma- chinery and increasing and ages the team responsible equipments. for mapping, researching changing profile . We and analyzing investment Now we see lar- see greenfield projects prospects in the Brazilian ger projects in economy. the economy, in contrast with the greenfield pro- In this exclusive interview to jects in contrast Puga: BNDES does not crowd out private investment previous brownfield the Brazil Quarterly Knowl- with the previ- edge Report, he says that, tice this shift in the profile of operations" during the acute period of ous brownfield investments. investments? This shift was recently cap- the global economic crisis, tured in a survey by the Puga: We started to notice the Brazilian economy faced Getúlio Vargas Foundation, this movement in 2006, but the risk of having 780 billion which shows that the type of at first only in sectors closely reais [$ 433 billion] worth of investment is changing, con- linked to intermediate investments halted due to firming our assessment. goods. deferred investment deci- sions. Those greenfield projects The investment cycle began are high-volume investments taking a new momentum Puga says that the role of that demand long-term, de- around 2002, at that time BNDES is to scale up the tailed assessments. We are very much related to the oil, Brazilian credit market, talking about large invest- gas and mining sectors, but stimulating the entry of pri- ments in infrastructure and also somewhat linked to vate finance companies in energy, projects with matur- China`s growth. large projects. ity periods over ten years. In 2006 we started to see a Following are the highlights Those are sectors in which the private financial system more mature process, espe- of the interview: cially in the intermediate still has a reduced role. BET: Taking into account the goods sectors, and espe- "The investment cycle expansion of BNDES` portfo- We understand that the pri- cially the steel industry. began taking a new lio since 2004, what is the vate financial sector still A few years ago, when talk- role of the Bank today, in an focuses on short-term opera- momentum around economy that is growing tions, on account of its li- ing about the steel sector, 2002, at that time very always same companies strongly? abilities. It is in our interest to look for ways to engage came up. In 2006, major much related to the Fernando Puga: Our effort is projects started to appear the private financial system oil, gas and mining to expand the credit market. in this kind of longer term and we also began to see a sectors, but also During the crisis there was a operations. North-South movement, with downturn in capital markets, businesses shifting produc- somewhat linked to We are also seeing a shift in tion to Brazil, attracted by and, in that sense BNDES Chinas growth" had to act anti-cyclically. But the scale of investment. the country's competitive- now the entire effort is to After many years, we again ness gains. New actors ar- expand the credit market have an investment rate rived in the steel, paper and and bring in the financial above 20 percent, approach- cellulose sectors. For exam- system. ing the world`s 22 percent. ple, Petrobras announced a This change depends both new petrochemical complex Brazil is moving towards a on the efforts of BNDES and in Rio de Janeiro (Comperj), 22 percent investment rate the market. which changes the level of in 2014, when we will be investment in the sector. hosting the World Cup. In- BET: When did BNDES no- Qua r te r l y K n o w l e d g e R e po r t Page 11 This arrival of new actors, with manufacturing unit in- BNDES offered non- vate banks pulled out, but vestments, is something that conventional credit lines not because of BNDES. If we we had not seen in a long such as for working capital. compare with other coun- time. How successful has this tries, BNDES`s intervention been? enabled Brazil to fare better BET: Can the pre-salt oil dis- than average, and it was coveries offset BNDES`s Puga: Unlike what happened achieved in a relatively not greenfield investments? in many countries, we no- so costly manner. ticed that there were no Puga: It is interesting that major problems with Brazil- As we emerge from the cri- this process, which started ian companies, which re- sis, we trust that the private in the raw materials industry mained fairly solid. So, there financial system will resume and then shifted to the inter- was no need to resort to its support. Therefore, this is mediate goods sectors, has business relief operations, not a crowding-out move- spread along the productive as was the case in the ment, on the contrary. chain. United States. BNDES contributed to sus- In 2007, the process tain a healthy business am- Rather, the Brazilian econ- bience, so that firms could reached those sectors of the omy was experiencing a economy more closely linked weather the crisis, increas- strong movement towards to household consumption, ing investment, and propiti- project deferment. With the on the tip of the productive ating the return of private crisis outbreak, business chain. At the same time, banks. investment decisions were there was a healthy move- being delayed and there was It is important to have the ment of improvement in "Nowadays Brazil has a risk that this would turn private sector supporting the household income. into cancellations. new investments in this dif- entered a virtuous Between 2007 and 2008 it ferent context. Not any more growth that is no So, BNDES launched a pro- had reached the auto sector gram to support invest- an economy with meager longer tied to the oil and construction, through investments and competi- and gas sector, or ments, which improved con- increased consumption. In tion for the weak credit de- ditions and set a horizon for mand, it is quite the oppo- related to increased 2008, there is a widespread improvements, initially the growth of investment, con- site. Chinese iron ore end of 2010 and later ex- tributing to the expansion of tended. The message was BET: Which reforms does imports" the domestic market. that the favorable credit BNDES consider important This virtuous growth is more conditions would not last, to leverage Brazil`s invest- robust and is no longer tied and businesses should rush ment rate? to the oil and gas sector, to investments to take advan- Puga: The expansion of capi- the discovery of reserves or tage of them. tal markets is important. related to increased Chinese The total investment outlook Brazil's Central Bank is mak- iron ore imports. After the in August 2008 for the in- ing an effort to create ways outbreak of the crisis, there dustrial and infrastructures to increase credit, for exam- was a downturn in the exter- sector was 780 billion reais ple the earmarked credit nal-market-oriented sectors. and this fell to 688 billion in operations. In the housing Now we are seeing some December 2008. In August sector, there was the intro- improvement in these sec- 2009, this bounced back to duction of segregated eq- tors. The prices for iron and 730 billion reais. uity, which reduces the risk paper and cellulose are re- in buying real estate. There BET: How does BNDES face were several achievements, covering, so investment is the prospect of competing not likely to remain focused and we must continue to with the private sector in the move forward in regulation. on oil and gas alone, due to long-term credit market? Is the Pre-Sal. However, the Also, there is an important there the risk of crowding- process to maintain the eco- new discoveries will mean out? that the oil and gas sector nomic stability: creating in- will lead investments. Puga: During the global cri- centives to increase savings sis, BNDES came in and in the economy BET: During the global crisis, sustained the market. Pri- Page 12 A u g u s t 2 0 10 A PATH TO EFFICIENT PUBLIC INVESTMENT MANAGEMENT By Tarsila Velloso* Figure 1--Investment Ratio (Percent of GDP) I n the last decades, Brazil has successfully re- stored aggregate fiscal discipline and improved fiscal transparency. How- ever, the quality of public investment has not kept pace with these improve- ments in public financial management. Despite dra- matic improvements in macro-economic stability, Brazil`s real long-run growth has room for ex- pansion when compared to other emerging econo- for the enhancement of identified in a recent paper mies. To do this, the Gov- the efficiency in those pub- by Rajaram et al.3 These ernment has proposed to lic infrastructure pro- basic features revolve raise Brazil`s total invest- jects.1 While PAC reflects around the following ment ratio to approxi- a renewed emphasis on stages in the PIM process: "Several key process mately 21 percent of GDP, growth-enhancing public (i) strategic guidance and by undertaking a con- investment, its perform- preliminary screening, (ii) issues usually certed effort to address ance has met implementa- formal project appraisal, combine to infrastructure shortages tion challenges. As a re- (iii) independent review of across all levels of the ad- sult, a persistent and sig- appraisal, (iv) project se- undermine the ministration. These efforts nificant question for Brazil lection and budgeting, (v) outcomes of public have most recently been is how can investment ex- project implementation, associated with the Fed- penditures be better chan- (vi) project adjustment, (vii) investments, eral Government`s Growth neled and implemented? facility operation, (viii) pro- including poor project Acceleration Program (PAC, A recent World Bank re- ject evaluation. selection and delays in in its Portuguese acronym). port2 has identified that The review acknowledges PAC and other associated several key process issues that Brazil has accom- their design" usually combine to under- plished much in terms of large scale initiatives are important steps to improve mine intended outcomes the coordination and exe- the performance of Brazil`s of public investments, in- cution of investment pro- public investment portfolio. cluding: poor project selec- jects. However, challenges These programs seek to tion process; delays in de- remain, especially in the improve budget execution sign and completion of selection, approval and of selected projects by projects; slow and litigious execution stages of public channeling resources, procurement practices; investment projects. avoiding funding freezes, cost overruns; and failure Figure 2 shows a compari- and using central agencies to operate and maintain son of Brazil`s perform- to closely monitor execu- public assets. ance on PIM against that tion. However, a lack of At the request of the Gov- of other countries. Brazil is funding is no longer the ernment of Brazil, the somewhat behind some primary constraint to effi- World Bank recently re- middle income and devel- cient investment: The lack viewed public investment oped countries, but well of institutional capacity for management (PIM) prac- ahead other important appraisal, implementation tices in the country. The middle income and lower and evaluation of public analysis was based on the income countries. investment projects contin- eight basic features of a ues to be a major obstacle The analysis concludes public investment process (Continued on page 14) Qua r te r l y K n o w l e d g e R e po r t Page 13 that, while there is a strong criteria, including cost Brazil can be addressed and clear link between the benefit analyses. On the quickly, such as strength- authorities` planning docu- other hand, the quality of ening oversight and strate- ments and processes, asset registers is improv- gic planning, many reforms there is room to strengthen ing. Finally, the implemen- will take more time to yield the degree of strategic tation of an ex post project results, as they depend on guidance for public invest- evaluation system, to com- bolstering the ability of ments. For many projects, pare expected benefits executing agencies to plan, there is no formal ap- and costs with actual design, elaborate and exe- praisal and independent benefits and costs, could cute high quality projects review. Projects also lack be of great value to future total cost control, although project. the budgetary impact is With increased growth, * This article is based on the present for the year. Brazil faces a legacy of "Assessment of the Efficiency of Pubic Investment Management" In implementation, PAC infrastructure shortages. report (2009) prepared by Jim has been able to introduce Addressing this will clearly Brumby and Juliana Wenceslau. important reforms; but result in important eco- 1. World Bank, Brazil, Improving deficient project elabora- nomic and social benefits. Fiscal Circumstances for tion, dispersed manage- Improved public invest- Growth, 2007. ment information and judi- ment management could 2. See Rajaram, A; Le Minh, T; "Improved public cial issues many times significantly increase the Biletska, N. and Brumby, J. leads to slow budget exe- outcomes and efficiency of (2008) A Diagnostic Framework investment cution. Adjustments to investments in the infra- for Reviewing Public Investment management could projects also do not ap- structure area. Some as- Efficiency. World Bank. pear to follow well-defined pects of improving PIM in 3. Idem. significantly increase the outcomes and Figure 2--Cross Country Comparison Against PIM Steps efficiency of Institutional features Chile Ireland Korea Brazil Belarus China Vietnam Nigeria investments in the Investment guidance & prelimi- infrastructure area" nary screening Formal project approval Independent review of appraisal Project selection and budgeting Implementation Adjustment for changes Facility operation Evaluation Source: J. Brumby and N. Biletska. Based on internal World Bank documents. Green means sig- nificant compliance with assessment framework; red means significant non-compliance. Orange is between green and red. Page 14 A u g u s t 2 0 10 BUILDING A PUBLIC MANAGEMENT POLICY COMMUNITY By Evelyn Levy states of Brazil as well as several municipal govern- The Brazilian media is start- O ver the past 20 years, public management reforms in Brazil have ments. During the confer- ences, about 500 papers ing to report on the results of public management im- were presented by public provements at the state achieved some important officials, academics and level. An editorial published landmarks: the 1988 Consti- in the country`s top weekly specialists of multilateral tution, which stressed merit magazine, Veja, dated organizations and consult- based recruitment and de- April, 21, 2010, suggests ant firms, highlighting inno- centralization of service vative approaches devel- that, to build upon Brazil`s provision to states and mu- recent economic and social oped in different places. nicipalities; the 1995 White achievements, whoever Paper of State Reform, Among the topics addressed wins this year`s presidential which introduced a manage- were best practices in hu- elections will have to face rial approach to the govern- man resource management, the challenge of enhancing mental structure and human procurement, e-government, efficiency, competence and resources management; the strategic and results based transparency at the federal Fiscal Responsibility Law management, inter- level, as some states have (2000), which tied public governmental arrange- done. expenditure to fiscal and ments, external and internal financial capacity. control, monitoring and It is fair to say that by creat- evaluation, citizen participa- ing the appropriate environ- "The CONSAD Although institutions matter, tion and public expendi- ment, the CONSAD confer- actual practices which allow ences are helping to lay the tures. Managerial aspects conferences have greater professionalism, developed in sectors such ground work for a far more efficiency, transparency and become an important citizen participation in public as health, education, prison efficient, responsive and administration, law enforce- effective public sector, spe- instrument of policy formulation and im- ment, culture and environ- cially by building a previ- plementation were progress- ously inexistent policy com- strengthening the ing at a slower path than ment were also discussed. From these discussions, munity Brazilian network of society would like. One of several state secretariats the main reasons was the public managers and started replicating similar lack of capacity of public experiences at the regional the exchange of organizations (Lopes and *The three CONSAD conferences level, thus attracting large Theisohn, 2003) and the were supported by the World knowledge" numbers of public officials absence of policy entrepre- working at the municipal Bank neurs (Abrúcio and Gaetani, Abrúcio, F and Gaetani, F(2006) level. 2006). Public management Agenda, aprendizado e coalizão, reform is possible when The CONSAD conferences in "Avanços e Perspectivas da people who share values, have become an important Gestão Pública nos Estados", information on good prac- instrument of strengthening CONSAD/FUNDAP, São Paulo tices and the capacity to the Brazilian network of Lopes, C. and Theisohn, T(2003) adapt these good practices public managers and the Ownership, Leadership and Trans- locally are available exchange of knowledge, as formation, can we do better for capacity development?, UNDP, (Andrews, 2009). one of the papers, coming New York from the State of Ceará, In its effort to improve public Andrews, M (2009) Isomorphism found: its authors presented sector management, the and the limits to African Financial their case about introducing Management, JFK School of Gov- Council of State Public Man- performance related pay agement Secretaries ernment ­ Harvard University, during the previous year, mimeo (CONSAD) has organized and mentioned that before three annual conferences*, implementing the new strat- the latest one in March egy they considered the 2010, which have unveiled lessons learnt from other evidence that a silent revo- experiences presented at lution is happening. The the previous CONSAD con- conferences gathered over ference. 5,000 participants from all Qua r te r l y K n o w l e d g e R e po r t Page 15 GREEN GROWTH IN BRAZIL By Mauro Azeredo Figure 1--Sector Emissions in the Different Scenarios B eyond its economic and development cre- dentials, Brazil is an envi- ronmental superpower, home to the Amazon rain- forest and its enormous biodiversity. The country has made much progress in addressing many of its development issues, espe- "Brazil could reduce cially a dramatic reduction its greenhouse gas in deforestation, and in applying innovative solu- emissions by up to 37 tions that reconcile growth percent--the and sustainability. sion reduction goals ahead environmental steward in of the November COP in international forums such equivalent of taking Still, a new World Bank study says that Brazil could Copenhagen. But at the as the G20. all of the worlds cars yet reduce its gross green- same time it reaffirmed its strong position that devel- The Bank`s Brazil Low Car- out of circulation for house gas emissions (GHG) bon Study significantly sub- by up to 37 percent be- oped countries have been stantiates the debate on three years--without tween 2010 and 2030 ­ responsible for most of the climate problem and Brazil`s climate protago- affecting economic the equivalent of taking all nism. According to it, the of the world`s cars out of should contribute propor- country has a great oppor- growth" circulation for three years ­ tionately to the solution, tunity to mitigate and re- while at the same time not at the expense of the duce emissions, mainly in maintaining the develop- developing nations. land use (like agriculture ment goals set out by the According to Izabella and deforestation), energy, government for that period, Teixeira, Brazil`s Environ- transportation and waste and without negatively af- ment Minister, Brazil is management. In each of fecting growth or jobs. one of the leading nations these, the study identifies Despite the advances, Bra- at climate negotiations, opportunities that would zil remains among the top with one of the world`s have no impact on eco- world sources of green- cleanest energy matrixes, nomic development. The and is offering creative and efficiency of those activi- house gases, especially if constructive solutions both ties is measured against a "Reaching the so- deforestation and land use are factored in, says the at the global and national reference scenario, tracing called ,,low carbon levels. This is demon- the current path into the report Brazil Low Carbon: strated by our voluntary future while incorporating scenario would Country Case Study. Ap- proximately 40% of Brazil`s commitment to reduce different development lev- require additional emissions by between els. Reaching the so-called gross carbon emissions 36.1% and 38.9% by low carbon scenario investments of around come from deforestation, even though recent efforts 2020. The Bank`s study would require additional US$ 400 billion over joins others proving Brazil`s investments of around US$ from the Government to 400 billion over twenty twenty years" protect forests have been potential. very successful. Still, to- Climate change is central years. gether with agriculture and in both Brazil`s internal Despite the cost, Nelson ranching, 75% of Brazilian policy and external voice. Barbosa, Economic Policy emissions derive from Many developing nations Secretary at the Finance changes in land use. hear their own concerns Ministry, believes that the The country is aware of the voiced by Brazil, and the study debunks the long- issue and announced emis- country can be said to act standing myth that achiev- as an informal climate and ing a low carbon economy Page 16 A u g u s t 2 0 10 is at odds with economic years in the making, much already substantial efforts and social development. of which in close interac- to maintain a clean energy For him, Brazil is well tion with the numerous matrix. placed to lead the world in government agencies in- In his opening remarks at the area while maintaining volved in all aspects of the launch, Makhtar Diop, a healthy economic growth, climate change, its eco- World Bank Country Direc- but needs to develop pub- nomic and social impacts. tor for Brazil stressed that lic policies and to consider The task involved approxi- the Bank is acutely aware incentives for gradual sub- mately 15 technical events of the importance of the stitution in sectors that throughout the country and issue to developing na- emit the most. abroad, and a core team tions. Global climate composed overwhelmingly "In the past two In the past two decades, change negotiations are by world-class Brazilian the environmental debate very complex and have decades, the has been increasingly researchers. enormous interests at environmental debate mainstreamed in Brazilian The grassroots technical stake. If not handled well, government and society, diplomacy and confidence efforts to reduce emissions has been increasingly and grew to be a consen- built with the line agencies, and stop climate change mainstreamed in sus among policymakers. political areas, civil society could have a deep impact For example, in the last five and academia during the on development, and that Brazilian government years, Brazil`s Federal Gov- period made it possible for would be a disaster for and society, and grew ernment has requested the team to achieve con- Brazil, but even more so to almost US$ 2 billion in siderate impact. The result the poorest nations of the to be a consensus World Bank loans for envi- was that the over 15 back- world, who would see their among policymakers" ronmental issues, most of ground papers and main prospects for development it linked to climate change. report were immediately dwindle even more. assimilated by the Govern- For these reasons, the The main message of the ment and technical com- Bank`s report drew consid- report for Brazil, says Chris- munity to inform the de- erable interest in govern- tophe de Gouvello, the bate and internal policy ment, academia and media World Bank Senior Energy making. The actions sug- during the official launch- Specialist who coordinated gested in the reports may ing on June 17, in Brasilia. the study is that avoiding be especially important to The study was almost three deforestation is by far the complement the country`s Figure 2--Greenhouse Gas Mitigation Wedges in the Low-Carbon Scenario 2010-2030 Qua r te r l y K n o w l e d g e R e po r t Page 17 best option to reduce GHG emissions in the country. The good news is that the Brazilian Government has been fighting deforestation quite effectively through forest protection policies and programs, but it also has the opportunity to use other instruments -- such as increasing the use of pastures and reintegrating degraded areas to the pro- duction cycle, avoiding en- croachment on new areas. Deforestation linked to cattle ranching in the Brazilian Amazon According to the study`s estimates, a new land use poverty reduction. sions, 4.7 percent in 2008, dynamic in Brazil would Brazil`s role as a leader in but the implementation of reduce deforestation by up environmental solutions to adequate policies could to 68% by 2030, compared reduce emissions is essen- reduce sector emissions by to the reference scenario tial to help steer the global up to 80 percent by 2030, estimated for that same a volume comparable to year. According to the re- debate, added Diop, for Paraguay`s entire emis- "A new land use port, market mechanisms whom the process that would not be enough to culminated in the launch- sions. dynamic in Brazil take advantage of all the ing of the report is best The sum of all the neces- would reduce opportunities Brazil has to practice on how to engage sary investments for each mitigate emissions. Public countries on sensitive pol- sector and the collateral deforestation by up to policies and planning are icy issues, while still deliv- effects on the rest of the 68% by 2030, essential, especially with ering cutting edge knowl- economy would counterbal- regards to managing land edge. ance the potential negative compared to the competition and forest In the energy sector, given effects and even promote reference scenario protection. growth and job creation, that emissions in Brazil are added Makhtar Diop. As estimated for that De Gouvello believes that already relatively low due the dialogue and technical to its renewable matrix, an investment, the low same year" opportunities for reduction carbon scenario generates work behind the report are lower. As with energy, profits in three ways: eco- succeeded in helping Brazil the Brazilian transportation nomic growth, long term build an even stronger sector is low-carbon in environmental sustainabil- base for environmental and development policies, comparison to other coun- ity and global benefits. in partnership with the tries, due to the wide- The Brazil Low Carbon Government. The report spread use of ethanol. Nev- Study is part of a series of also strongly upholds the ertheless, public transpor- analytical works on low message shared by Brazil tation policies in cities carbon development sce- and the World Bank: that could reduce emissions by narios for several coun- there cannot be global so- 26 percent by 2030. Com- tries. The World Bank re- lution to the climate bining these with an in- cently published the Global change challenge if the creased use of ethanol Development Report on point of view of developing could possibly double Climate Change and the countries are not taken these reductions. The Latin America and the Car- into account, and that this waste management sector ibbean Report on Low Car- cannot be done at the ex- accounts for the lowest bon Development pense of development and share of Brazilian emis- Page 18 A u g u s t 2 0 10 SUMMER (OR WINTER): ITS TIME T O T R AV E L . . . By Jivago Ximenes and behavior of imported temporaneous) shock on Tito Cordella goods. Doing so, we try to the real effective ex- N assess which countries change rate (REER) or owadays, Miami and are travelophiliac and GDP growth on travel ex- New York speak Por- which are importophiliac, penditures is almost twice tuguese, and so does depending on their willing- that on imported goods1 Paris, as did South Africa, ness to visit new places or (see table below). at least for half of the to consume highly taxed More simply, the analysis World Cup. The press is imported goods at home. suggests that, in Latin not alone in reporting on America, positive term of this new trend. According To start with, we test a trade shocks or growth to the Central Bank`s July very simple (dynamic spurs increase the traffic 2010 External Sector Re- panel) model to explain to airports more than the port, Brazilian tourists` quarterly travel expendi- traffic to shopping malls. expenditure abroad ex- tures and total imports in This means that, on aver- ceeded Brazil`s revenues Argentina, Brazil, Chile, age, Latin Americans are from foreign tourists on Colombia, Mexico and "We assess which month by month, semes- Peru as a function of the travelophiliacs. The next countries are question is to look beyond ter, and 12-month basis; exchange rate and GDP the mean and see which travelophiliac and and the tourism accounts growth (and other control countries like to travel in the balance of pay- variables and fixed ef- which are more. Thus, we performed ments posted the worst fects). Our main result is Vector Autoregressive importophiliac, result in recorded history that the effect of (a con- (since 1947). depending on their Travels t Imports t Disposable income, due willingness to visit to the good performance Travels t-4 0.82 - new places or to of the Brazilian economy, (0.084)*** partly explains this travel consume highly taxed boom, but exchange rate Reer t 0.93 - imported goods at considerations also play a (0.339)** home." major role. More pre- cisely, if the financial sec- Reer t-1 -0.464 - tor is shortening the (0.103)*** strong real by accumulat- ing dollar positions, as Reer t-2 0.49 recently reported by the (0.128)** Central Bank, families may be shortening the Growth t 2.984 0.329 currency by travelling. In (0.905)** (0.73) plain English, Brazilians are taking advantage of Growth t-1 3.186 2.652 the strong real (which may (1.120)** (1.153)* last or not) to travel abroad. World trade t 0.766 This (travel time) piece (0.072)*** tries to quantify how the Observations 292 304 demand for travel reacts to exchange rate fluctua- Number of countries 6 6 tions and GDP growth in a R-squared 0.76 0.77 number of Latin American countries, including Brazil, Robust standard errors in parenthesis. *, **, *** mean signifi- and compare it with the cance at 10 percent, 5 percent and 1 percent respectively Qua r te r l y K n o w l e d g e R e po r t Page 19 Figure 1--Cumulated elasticity of travel expenditures and imports due to REER positive shock in t=0 "Brazilians have the strongest response on travel expenditures vis Model (VARM) models for ports, in the two quarters Summing up, our econo- -à-vis the change on six Latin American coun- following an exchange metric analysis confirms imports than any of tries (Argentina, Brazil, rate appreciation. That is, the anecdotal evidence Chile, Colombia, Mexico a strong currency induces that within a continent of the other Latin and Peru) and analyzed people to travel more than travelophiliacs (with the American countries in the impulse responses to consume imported exception of Peru) Brazil- from a REER positive 1- ians are the ones that like the sample" goods. standard deviation shock to travel the most. Maybe Interestingly, Brazilians onto travel expenditures this is no big surprise but have the strongest re- and imports. we all know that eco- sponse on travel expendi- nomic analysis sometime Overall, our Latin Ameri- tures vis-à-vis the change just states in a formal can countries show a on imports than any of the what laymen already similar behavior. In Figure other Latin American 1 above, we plot cumu- countries in the sample. know lated travel expenditures More precisely, in the first and import elasticity, both two quarters after a posi- 1. In our model, what drives with respect to REER2. tive 1 percent exchange travelers' decision to travel is With the notable excep- rate shock, Brazilians the contemporaneous exchange rate (Reert) while for importers tion of Peru, all the coun- spend 0.82 percent more we assumed that the lagged tries in the sample show a in travel, while imports exchange rate (Reert-2) is what higher elasticity in travel increase only by 0.22 per- matters, given supply con- expenditures than in im- cent. straints. EDITORIAL (CONTINUED FROM PAGE 1) creases. The answer may shed new light on whether CCT benefits can be used as crisis management instru- ments. Her main finding is that while the increase in Bolsa Família`s benefits helped the extremely poor, it did not end up having a significant effect on aggregate measures of poverty and inequality. Against common claims that the program may disincentive work, Guilherme Lichand provides some convinc- ing evidence that Bolsa Família may foster entrepreneurship. The savings channel is another dimension cash transfers may foster long term growth. Romero Rocha sifts through IBGE's data to shed new light on how the recent pro-poor growth trend may have helped increase the country`s propensity to save. The Quarterly Knowledge The savings-investment nexus will be critical for increasing Brazil`s long term growth prospects. Indeed, major infrastructure challenges lie on the road ahead for Brazil. In the space of six years, the country will host both Report is a publication of the the World Cup and the Olympic Games. This will demand massive investments with substantial development World Bank impacts. In an exclusive interview, the head of the Economic Research Department of Brazil´s National Devel- opment Bank (BNDES), Fernando Pimentel Puga, explains how the country´s long term credit market needs to adapt to meet these challenges, and how BNDES helped push Brazil through the crisis. On the investment side, nothing is as big in Brazil as the challenge of becoming a major oil producer. Marcio Gold Firmo looks into how the huge oil discoveries known as the Pre-Sal will impact on the Brazilian econ- omy. Averting the risk of an oil curse will be intimately linked to how the windfall is managed. Tarsila Velloso brings us up to speed about an important review of public investment management, which identified possible paths for increased efficiency. Sign up to receive BET A consensus is rising in Brazil that to be economically sustainable, long term growth should also be environ- mental sustainable. The landmark Brazil Low Carbon Country Case Study reveals that Brazil could reduce its reports: greenhouse gas emissions by up to 37 percent by 2030 while maintaining its development goals and without betmail@worldbank.org negatively affecting growth or jobs. The report, coordinated by Christophe de Gouvello, is already helping mold Brazilian policy all the way up to the Finance Ministry. Finally, in a lighter travel time piece Tito Cordella and Jivago Ximenes asked themselves what good is a Contacts: highly valued currency: shop till you drop or see the world? As many in Brazil wrap up their winter break, the latest Central Bank data hints that they may be doing both, but how much so, and how do Brazilians compare Tito Cordella with their neighbors? Enjoy your reading! Mauro Azeredo Makhtar Diop WB Link: 5761-1000 Brazil Country Director Ph.: +55 61 3329-1000 IN THE LOOP BET Publications Some of the quarters noteworthy events BET Daily Report: the most important daily economic Events Projects Approved news and indicators about the Brazil BBL: The Effects of CCTs on Entre- Rio de Janeiro Municipality Fiscal Consolida- Brazilian economy [internal]. preneurship with Guilherme Lichand-- tion for Efficiency and Growth DPL--$1.045 August 11 billion Brazil Monthly Report : updated information on Judicial Transparency and Accountability Eletrobrás Distribution Rehabilitation--$ 495 economic developments, Regional Conference ­ August 4 million policy challenges, and Brazil BBL: Violence in the City: wirh São Paulo Sustainable Rural Development economic trends [internal]. Alexandre Marc and Erik Alda--July 22 and Access to Markets--$ 78 million Brazil Low Carbon Seminar ­ June 17 AIDS-SUS --$ 67 million Quarterly Knowledge Report: information about our Brazil BBL: The Political Economy of In- Sustainable Cerrado Initiative: Goiás Sustain- analytical work and short vestment in Pre-Primary Education with able Cerrado & ICMBio Cerrado Biodiversity knowledge pieces on policy Katrina Kosec--June 14 Protection Project (GEF)--$ 6 million relevant questions. 2nd Rio Human Development - June 1-3 Mato Grosso do Sul State Road Transport Sustainable Cities Seminar - June 8 Project--$ 300 million ---- Africa-Brazil Ministers of Agriculture Con- São Paulo Water Recovery Project - REÁGUA-- The Quarterly, Monthly and ference - May 10-12 $ 64.5 million Daily Brazil reports are in the Local Development and Impact Assess- São Paulo Metro Line 4 (Phase 2)--$ 130 Brazil Intranet: ment Seminar - May 9 - 11 million http://go.worldbank.org/EX2K94 IBSA Editors Forum--April 15-16 São Paulo Metro Line 5 Project--$ 650.4 L7V0 XII Workshop in International Economics million and Finance - April 8-10