Reinventing Brazil's economy

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Welcome from Sao Paulo in Brazil, where I had been interviewing the finance minister, Henrique Meirelles. Now he's quite a veteran of the finance industry. He ran the Bank of Boston in the US for many years.

He served two terms as Brazil's central bank governor, but this is arguably his toughest test yet, trying to pass a raft of economic structural reforms, while Brazil is still stuck in recession. I started out by asking him whether he could possibly hope to reduce Brazil's serious deficits without raising taxes.

Yes. The cap is on expenses, which means that regardless of the level of revenues, we'll have the total level of expenses as a percent of the GDP coming down. Then there will be less requirement for taxation, in the sense that total expenses, as a percent of the GDP drops from 20% to 15%. Then in due time, we actually are expecting to have a decrease in the level of taxation in the economy. The moment that these decrease in the total amount of expenses as a percent of the GDP would allow for larger and larger positive result in the primary numbers. And as a result of that in the future, probably in some few years ahead, we can think about cutting taxes.

Now the single most important reform is to Brazil's pension system. Making people have to work longer before they can retire is always unpopular.

One of the most important points of the reform is to have the private sector and the public sector with the same rules. Today, they are very different. They become the same one. That's the first point.

The second point is to have a minimum age for retirement, which is going to be if the reforms approved, 65 years. Regardless of the time of contribution, one has to reach that age. That is a very important change.

Evidently, the first reaction is people don't like it, because they want to retire earlier. That's OK, understandable. But the question now is how to explain that to people and make sure that everyone understands that, number one, it's very important to have that reform approved for the growth rate, and the GDP to come down, to be sustainable over time, and for Brazil to be able to create jobs, increase the level of income, the per capita income of the people. And for that to happen its important to approve the social security reform. And lastly, it is important, also, that everyone is sure that the social security system is solvent.

Still another major reform that Mr. Meirelles wants to do before the next election is to reform Brazil's byzantine tax code. It's very complicated, but tax reform is notoriously difficult to pull off. Can it be done?

There was the governance rules for state owned companies, a very good and rigorous one, which was approved. The rules for the offshore oil drilling were also approved, decreasing the conditions for Petrobras participations and all of that. In summary, all the basic proposals are being approved, because this government was at the end of the day chosen by Congress and the moment the Congress took the decision, which allowed the president to take over.

As a result of that, this government is very strong at the level of the Congress. And has been successful in approving the basic reforms. And our expectation is that in due time, when the economy begins to grow, employment comes down. It comes back as a result of all this.

And it's already beginning to happen. The popular approval will fall. That's the time to do it. And what has already been approved, it was unthinkable a few years ago.

And all of this, the government also wants sweeping changes to employment rights. Again, can that be passed?

First part of the labour reform was already approved, which was the so-called outsourcing. The second part-- which I think is going to be approved, as well-- it's something, which is the end of the day a much easier proposition than social security, according to our surveys, et cetera, and with the discussion of Congress, which is the fact that the idea is to have the agreement prevailing over that law, which means that if the unions and the companies agree or if the workers, even without unions and the companies agree on some set of rules, the judge cannot come and decide that that's not fair, because of this or that.

Could you even say you are reinventing Brazil?

I think so. I think that we are now seeing Brazil improving, discussing reforms, which had never been discussed before. For instance, now with the ceiling on government growth, we have for the first time, since the Brazilian constitution was approved, to have the governments of the percent of the GDP coming down. And more money, more resources will be available for investment and consumption.