Brazilian Regional Brazilian Regional PolicyPolicy

Senator Tasso Jereissati (2003-2010)Former Governor of the state of Ceará (Northeast Brazil)

Russia and World Bank Workshop on Regional Development Strategies – March, 31st 2008

IntroductionThis presentation is divided in two parts:

o In the first part, I will be talking about the regional development in Brazil and the new concept of regional policy I worked together with other senators at the Brazilian Senate.

o In the second part, I am explaining how the government of a poor state can implement pro-development policies despite lacking the active support of the federal government. This part of my presentation is based on my previous experience as the governor of the state of Ceará in Northeastern Brazil (1985-89; 1995-98 and 1999-02).

Part I – Regional Policy in Brazil Brazil is a country divided into five regions. Two

regions (North and Northeast) still have social and economic indicators far behind the average for the country.

The Southeast region with 42% of the population accounts for 58% of the Brazil’s GDP; while the Northeast region with 28% of the Brazil’s population accounts for only 13% of the Brazil’s GDP.

The per capita GDP in the Northeast region is 47% of the average for the country and in the North region this figure is 66%. These are the two regions in Brazil with the highest poverty rates.

REGIONAL INEQUALITIES - BRAZIL

SOURCE: IBGE. Contagem Populacional, 2007. IBGE. Contas Regionais. PIB Municipal, 2007. IBGE. Pesquisa Nacional por Amostra de Domicílios, 2006. * % of 15 and older.

REGIONSGDP 2005

(BR= 100%)

POPULATION 2007

(BR=100%)

GDP per capita

(BR=100%) 2005

ILITERACY RATE 2006*

NORTH 4,6 7,9 62 15,6

NORTHEAST 13,1 28,0 47 24,6

SOUTHEAST 57,8 42,3 133 7,5

SOUTH 17,6 14,5 113 7,0

CENTER-WEST 7,0 7,2 125 9,7

BRAZIL 100,0 100,0 100 12,8

Municipal Human Development Index (HDI) - 2000

The areas with the lowest HDI (in red) are in the North and Northeast regions.

The three phases of regional development policies in Brazil The First-Phase (1960s – 1980s): the main policy

was to provide venture capital to new investments in poor regions.

The government created three regional funds to provide venture capital to new investments in the three poorest regions in the country : North, Northeast and Center-west.

These funds were operated by three regional development agencies. One for each poor region (SUDAM, SUDENE and SUDECO). In addition, the state governors also participated in the policy proposals of these regional agencies.

These funds and the regional policy worked well until the mid 1980s. In the 1990s, the regional development agencies were gradually dismantled and the funds for venture capital were discontinued.

The second-phase (1988-2003): the policy aimed at providing subsidized credit to private firms and increasing in-cash transfers to the poor.

• The Brazilian Constitution created three new regional financial funds (FNE, FNO and FCO) and established many programs of in-cash transfers.

The new regional financial funds started to provide subsidized credit for investment capital in the North, Northeast and Center-west.

The government gradually increased the cash transfers to the poor: rural workers and elders.

In the 1990s, the focus of the Brazilian regional polices was in-cash transfers.This policy was named by some economists as “the growth of the non-productive economy”.

Therefore, the Brazilian states embarked in a fiercely competition to attract investments from the south and southeast Brazil.

The state governments started to grant tax incentives based on their own revenues to attract new investments from Brazil’s South and Southeast “Fiscal Wars”

The third phase (2006-2008): the design of a new regional policy.

In the president Luis Inácio Lula da Silva’s term (2003-2010), the government decided to re-create the regional development agencies. But it has not been implemented yet.

At the Brazilian Senate, we tried to re-create the regional development agencies based on the idea that regional policy, nowadays, involves investments in the people living in poor regions (health and education), higher investments in infrastructure as well as subsidized credit to new investments;

The law creating the regional development agencies was approved at the end of 2006; but the government vetoed many of the innovations we approved at the senate, including a new fund to provide venture capital to important investments in the North, Northeast and Center-west of Brazil.

At the senate, we demanded that the federal government propose a regional multi-year plan with specific goals to economic and social indicators (GDP per capita, average years of schooling, infant mortality rate, sewage, etc.).

Every year, the regional development agencies would evaluate whether the economic and social indicators of states and regions were converging to the Brazil’s average. If not, the federal government would have to take additional measures to make the figures meet the goals established in the regional development plan.

The idea is similar to the United Nations Millennium Development Goals. But this concept of regional policy approved at the Brazilian Congress at the end of 2006 has not been implemented yet.

Where are we today (2008)? At the senate, we are debating a tax reform that will curb

the state’s incentives to attract new investments.

But I am convinced that a political coalition to approve the tax reform will depend on the commitment of the federal government to provide funds to finance the regional development.

Therefore, despite the recent re-creation of the regional development agencies, we are still struggling to convince the Brazilian federal government to effectively implement the new ideas embedded in the law approved at the Senate.

A regional policy must go beyond in-cash transfers. It should also involve higher public investments in poor regions coupled with incentives to increase the private investment. Unfortunately, in-cash transfers to the poor by itself will not bring new jobs to emerging regions.

Part II – Local development policy

Ceará is a poor state located in Northeast Brazil – the poorest region in the country.

The per capita GDP (2005) in Ceará is among the five lowest for the 27 Brazilian states.

In spite of being a poor state located in a poor region, the state has been showing an impressive progress in both economic and social indicators.

Important indicators1. The Life expectancy in Ceará for over 40 years

(1940-1980) was exactly the same -- 46 years. However, since the mid 1980s this figure has been increasing steadily and it reached 70 years in 2005.

2. The Infant mortality rate: in 1980s, the infant mortality rate in Ceará was 102 per 1,000 (the number of infant deaths by the number of 1,000 live births). This figure was among the worst in Latin America. When I left the government, this figure had dropped to 35.1 and reached 30.8 in 2006. This sharp drop was the highest in Brazil and led the state of Cerá to be awarded by UNICEF.

3. Average years of schooling: The average years of schooling in Ceará went up from 3.4 years in 1992 to 5.1 years in 2005;

4. The percentage of households with electrical energy went up from 65.4% in 1992 to 95.6% in 2005; and

5. And in the 1990s the Ceará’s GDP growth outpaced the economic growth of both the Northeast region and Brazil. This fast economic growth happened hand in hand with a sharp fall in poverty rates and a fast increase in the HDI.

GDP growth rates (1985-2005) – Ceará vs. Brazil – % per year (5-year average)

Humand Dev. Index and Poverty rates

How can we explain this economic and social progress in Ceará from 1986 to 2005? Our government made a huge fiscal reform in

the 1980s. It was this reform that allowed the government to increase its spending on social policies and make new investments in infrastructure;

In my first term as the state governor, I implemented a preventive health program together with the community councils;

I also invested heavily in education; and

I adopted an aggressive policy to recruit new investments to Ceará; grating tax incentives for new industrial investments.

Fiscal reform (1986-1990) Preventive health program (1987)

We decreased the number of civil servants; many of them did not even exist but were in the state payroll;

The state government recruited new tax inspectors to increase local tax collection;

The state of Ceará was the first in Brazil to sign with the federal government a plan to increase the maturity of the state debt;

The revenue that resulted from the privatization of state companies was invested in infrastructure and not current spending.

The program involved a close partnership between the state and the communities councils;

The state provided financial resources to the cities to hire the health agents.

The health agents are local unskilled workers who are trained to teach basic and preventive health care to local families;

This program was replicated by the federal government to all Brazilian states in the 1990s.

Educational reform Economic incentives targeted at new investments (1990-2002)

The state and municipal governments hired 30,000 new professors;

The state started an ambitious program to promote the training of all state professors (undergraduate and graduate courses);

The state established a program to evaluate public schools and students;

The state increased the local communities control over the public schools – community councils.

The state government started to grant tax incentives for new investments;

The tax incentives did not decrease the state’s revenue because it was based on the tax increase brought about by the new investments;

The tax incentives were higher for firms located in the state countryside;

Ceará today has the highest labor force in the industrial sector in the Northeast region.

conclusion1. Local governments can contribute to the local

development if they are able to get the funds to invest in education, health and attract new investments.

2. But there is a limit. A poor state will need the assistance of the federal government to promote the development no matter how good the local government is.

3. I believe that we must look to the European Union regional policy. They have three different funds to invest in education, infrastructure and promoting new private investments in lagging regions. Brazil and Russia need to follow suit.

THANK YOUSenator Tasso Jereissati

http://www.senado.gov.br