External and internal economic vulnerabilities of brazilian economy and how to overcome them

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EXTERNAL AND INTERNAL ECONOMIC VULNERABILITIES OF BRAZILIAN ECONOMY AND HOW TO OVERCOME THEM

Fernando Alcoforado *

The study of external and internal economic vulnerabilities of the Brazilian economy at present included the analysis of the following variables: 1) Trade balance; 2) Balance of payments on current account; 3) Foreign direct investment in Brazil; 4) Participation of the industry in the formation of Brazilian GDP; 5) Brazil 's international reserves; 6) Economic growth of Brazil; 7) Evolution of unemployment; 8) Rates of saving and investment in Brazil; 9 ) Rate of public investment in Brazil; 10) Evolution of inflation; 11) Evolution of the Selic rate; 12) Domestic public debt; 13) General budget of government and allocation of public spending; 14) Creditors of domestic public debt; 15) External debt; 16) Management crisis in the public sector in Brazil; 17) Regional inequalities , and 18 ) Social inequalities and environmental problems. After analyzing each of these variables, it were proposed at the end of the study strategies to overcome the internal and external economic vulnerabilities.

1. Analysis of Brazil's trade balance

Figure 1, below, shows the evolution of the trade balance of Brazil from 1980 to 2013. This balance represents the difference between the revenue from exports and expenditure on imports of goods and services. Analysis of Figure 1 reveals that, after surpluses recorded from 2001 to 2007, there was a decrease in the surplus from 2008 to the present time as a result of the global crisis that erupted in 2008 in the United States. The fall in commodity prices resulting from reduced demand from the United States, European Union and China, among other countries led to the deficit from 2007 to 2012 in Brazil's trade balance.

Figure 1 - Evolution of Brazil's trade balance

Source : http://www.cartamaior.com.br/?/Editoria/Economia/Cambio-fora-de-lugar/7/28512

The year 2013 will present a surplus of only $ 2 billion. This is the most current forecast of the Central Bank (BC) o Brazil and, if confirmed, it will represent a decrease of 89.7 % compared to a surplus of US$ 19.4 billion in 2012. The fall of the balance between

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exports and imports will be the highest in the last 18 years. Over the past 50 years, only three governments in reducing the trade balance occurred at a rate greater than that observed in the management now Dilma Rousseff. It were in the years 1962, under the presidency of João Goulart, during the military regime in governments Emilio Garrastazu Medici in 1971 and Ernesto Geisel in 1974 and 1978.

It should be noted that the trade balance in 2013 can be negative, ie, presenting a deficit that is not totally discarded. The main variable in determining this outcome will be the performance of "petroleum account", a name given to exports and imports of oil and oil products.

2. Analysis of the balance of payments on current account of Brazil

Figure 2 shows the balance of payments on current account of Brazil from 1994 to 2012. The balance of payments on current account is composed of the trade balance, balance of services and unilateral transfers. It can be seen from Figure 2 that the balance of of payments on current account shows deficit from 2007 to 2012 following the decline in the trade balance of Brazil (Figure 1).

Figure 2 - Evolution of the balance of payments on current account of Brazil

Source : Own elaboration

The deficit in the balance of payments of US$ 43.48 billion (corresponding to more than 3 % of GDP of Brazil) recorded in the first half of 2013 was due to several factors being the first the poor performance of the trade balance for the reasons cited above that showed negative balance of US$ 3.1 billion caused mainly by falling of commodity prices, and the second relates to the costs of Brazilians traveling overseas with US$ 8 billion. There is one aspect of the balance of payments that is important to consider, being the main point of view of national interest with regard to remittances of profits and dividends corresponding to the largest portion of the deficit in the balance of payments.

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But alone, the main cause of the deficit in the balance of payments of Brazil were the remittances of profits and dividends by multinational companies, which reached the sum of US$ 14.1 billion, 41.3 % higher than in the same period in 2012. Profit remittances are growing tremendously in recent years, especially since the 2008 global crisis when foreign arrays passed to help finance its affiliates, becoming a surcharge requiring Brazil to help them face the global economic crisis. These remittances in recent years have far exceeded the value of remittances from foreign debt interest.

The global crisis of 2008 that still lingers in the world explains the increase in remittances of profits, since the multinational matrices in financial difficulties, demand more and more financial resources. The result of all this is the denationalization of the Brazilian economy, which is the major problem that undermines the country's external accounts. The denationalization proceeds through direct investments in mergers and acquisitions of domestic enterprises (which account for over 50 % of foreign direct investment). This created a vicious circle: the coverage of the current account deficit is through the dollars that come in the form of foreign investment, but the objective result of the inflow of foreign capital ends up being the expansion of external liabilities and denationalization, allowing growth revenues from foreign capital remitted to headquarters. Therefore, besides contributing to the denationalization of the Brazilian economy, the deficit of the balance of payments current account further increased the Brazilian dependence on foreign capital to the growing demand for foreign direct investment.

3. Analysis of foreign direct investment in Brazil

Figure 3 shows the evolution of direct investments in Brazil from 1994 to 2012. Analysis of Figure 3 reveals that direct investment rose steeply from 2007 to 2012 contributing on the one hand, to cover the deficit of the balance of payments on current account and the other, to the process of denationalization of the Brazilian economy. It is also noted that the direct investments were high enough to cover the deficit of the balance of payments current account (Figure 2).

Figure 3 - Direct foreign investment in Brazil

Source: Own elaboration

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The opening of the Brazilian economy inaugurated during the Collor government and deepened by the Cardoso government was sustained by governments Lula and Dilma Rousseff contributing to the large flow of foreign capital to Brazil translated in foreign direct investment. The large volume of foreign direct investment, excessive intake of dollars attracted by high interest rates Selic adopted by the Central Bank of Brazil and the policy of floating exchange rates contributed to the overvaluation of the real against the US dollar affecting the competitiveness of the Brazilian in the world market and imported products.

4. Analysis of the participation of Brazilian industry in the GDP of Brazil

After a period of great expansion from 1947 to 1985, the participation of Brazilian industry in GDP has been declining setting a framework of deindustrialization that presented in 2011 an amount equivalent to that recorded in 1956 when the government launched its Juscelino Kubitichek Target Plan (Figure 4).

Figure 4 - Evolution of the participation of Brazilian industry in GDP ( % )

Source : http://textileindustry.ning.com/profiles/blogs/participa-o-da-ind-stria-no-pib-recua-aos-anos-jk

The opening of the Brazilian economy since 1990 has worsened the situation of the Brazilian industry because it has lost competitiveness due to cost barriers represented by Brazil Cost (endemic corruption in Brazilian public sector whose annual cost in Brazil is around 41.5 and 69.1 billion reais, high public deficit, high real interest rates, high "spread" banking, the highest tax burden of 35% of GDP, high labor costs, high costs of the pension system, tax laws complex and inefficient, high cost of electricity, poor infrastructure and lack of skilled labor). The weakening of the Brazilian industry was decisive for half of foreign direct investment in Brazil was held for the acquisition of many of them.

5. Analysis of the evolution of Brazil's international reserves

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Some analysts believe that Brazil has no great risk in their external accounts because presented in June 2013 international reserves amounting to US$ 370 billion. Figure 5, below, shows the evolution of the international reserves of Brazil from 1990 to 2008.

Figure 5 - Evolution of Brazil's international reserves

Source:http://www.fgv.br/professor/rubens/HOMEPAGE/LIVROS_E_CAPITULOS/Contas%20Externas/Ilustra%C3%A7%C3%A3o%201_7.html

Note about the chart: black lines represent the relationship between the value of the reserves in % of GDP and the bar graph (red) shows the values of the international reserves in billions of dollars.

The analysis of Figure 5 reveals that international reserves jumped mean US$ 15 billion in 1990 to US$ 40 billion in 1994 and another big jump from US$ 30 billion in 2001 to US$ 180 billion in 2009 and US$ 370 billion in June 2013. The recent progression of the negative balance of payments on current account causes concern because its evolution in the medium and long term can become unsustainable financing the current account deficit with external resources, thus contributing to the reduction of international reserves, which would then be used to cover this deficit. This problem should not be overlooked. The balance of payments problems recently faced by some countries of the European Union made them had to submit to the dictates of the European Central Bank and the IMF.

The economic history of Brazil presents numerous examples of crises caused by similar problems in the external accounts as the debt crisis of the 1980s and 1990s, the crisis of 1988/89 and 2002. These crises led the country into the arms of the IMF and the draconian conditions of economic adjustments imposed by international financial agencies, with serious damage to the national sovereign. Adjustments that left a trail of

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unemployment, poor economic growth and general impoverishment for workers. Brazil has 370 billion dollars in international reserves, but may need to refer to them in the coming months if foreign investors lose faith in the economic growth of the country that has drop in their recent developments and fail to invest in Brazil (Figure 6).

6. Analysis of growth of GDP in Brazil

The economic growth of Brazil from 1994 to 2012 has shown a poor performance by not presenting sustainably rates above 5% per year needed to generate employment and income in Brazil. The average growth rate from 1994 to 2012 was 1.45% per year.

Figure 6 - Evolution of the GDP of Brazil from 1996 to 2012

Source: http://www.meioemensagem.com.br/home/marketing/noticias/2013/03/01/PIB-cresce-menos-de-um-porcento-em-2012.html

In the text under FMI aponta dívida pública elevada e gargalos na infraestrutura brasileira (IMF aims high public debt and bottlenecks in infrastructure in Brazil), published on the website of the newspaper Folha de S. Paulo, the International Monetary Fund considered disappointing growth prospects of the Brazilian economy pointing motives over a document of 249 pages on the world stage. The reasons cited by the IMF for the drop in economic growth in Brazil are growing deficit in trade in goods and services with the rest of the world, the difficulty of investing in infrastructure, inflation above target requiring an increase in interest rates to curb consumption and, contrary to fold the Brazilian government, high public debt.

7. Analysis of unemployment in Brazil

The unemployment rate was presenting decline from 2009 to 2011 as shown in Figure 7. However, the recent fall in GDP growth is already contributing to the increase in the unemployment rate in the Brazilian economy in April 2012.

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Figure 7 - Rate of unemployment in Brazil

Source : IBGE

8. Analysis of the rates of saving and investment in Brazil

The difficulty of the Brazilian government to invest in infrastructure stems from the failure of public and private savings in Brazil should be around 25 % of GDP to enable economic growth of 5 % per year and currently accounts for 17.2 % of GDP as is shown in Figure 8.

Private investment has been insufficient due to Brazil Cost whose causes are endemic corruption in Brazilian public sector whose annual cost is around 41.5 and 69.1 billion reais, high and rising public debt, high real interest rates, higher " spread" banking, the highest tax burden of 35 % of GDP, high labor costs, high costs of the pension system, tax laws complex and inefficient, high cost of electricity, poor infrastructure and lack of skilled labor. In turn, the public investment (Figure 9) is insufficient due to excessive commitment of the budget of the Republic with the payment of interest and armotization of domestic debt (Figure 14).

Figure 8 - Evolution of the saving and investment rate in Brazil

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Source: IBGE

Note about the chart: the investment rate (line of red color) and savings rate (pink color)

9. Analysis of the rate of public investment in Brazil

Figure 9, below, shows the evolution of the rate of public investment in Brazil in the %GDP from 1999 to 2012.

Figure 9 - Evolution of the rate of public investment in Brazil ( % GDP )

Source : http://diplomatizzando.blogspot.com.br/2013/06/esquizofrenia-fiscal-no-brasil-acho-que.html

The analysis of Figure 9 reveals that the rate of public investment is very low in Brazil (1.09 % in 2012). The IMF questions in the publication of the newspaper Folha de S. Paulo cited above that the high public expenditures make no budgetary resources for investment in infrastructure.

Article Brasil precisa investir R$ 100 bi ao ano em infraestrutura (Brazil needs to invest R$ 100 billion per year in infrastructure) posted on the website <http://veja.abril.com.br/noticia/economia/pais-precisa-investir-r-100-bi-ao-ano-em infrastructure -> inform that the "country would invest 2.5 trillion dollars additional over the next 25 years to achieve investments in the 4 % of GDP, the minimum needed to reach a reasonable level of modernization". Brazil would need to invest additional US $ 2.5 trillion over the next 25 years to double the level of investment in the sector from the current 2% to 4% of the Gross Domestic Product (GDP), according to calculations by economist Claudio Frischtak, Inter. B Consulting.

Paulo Fleury of Instituto de Logística e Supply Chain published in September 2011 text under the title Infraestrutura: situação atual e investimentos planejados (Infrastructure: current situation and planned investments) in which estimated the necessary investments in ports (R$ 42.9 billion), railways (R$ 130.8 billion) and highways (R$ 811.7 billion), totaling R$ 985.4 billion. Adding this value to the investments needed to waterways and inland ports (R$ 10.9 billion), airports (R$ 9.3 billion), power sector (R$ 293.9 billion), oil and gas (R$ 75.3 billion), sanitation (R$ 270billion) and telecommunications (R$ 19.7 billion) totaled R$ 1,664.5 billion.

In turn, the health sector requires investments of R$ 83 billion per year informed on the website <http://noticias.r7.com/brasil/noticias/governo-precisa-investir-ao-menos-60-a-

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mais-para-melhorar-a-saude-no-brasil-20110921.html>, education sector needs investment of R$ 16.9 billion / year to obtain quality education in Brazil informed on the website <http://agenciabrasil.ebc.com.br/noticia/2013-09-14/apesar-de-mais-altos-investimentos-em-educacao-ainda-sao-mal-distribuidos-aponta-ocde> and public housing needs R$ 160 billion to eliminate the housing shortage informed on the website <http://www.cimentoitambe.com.br/deficit-habitacional-no-pais/>. The total investment in economic infrastructure (energy, transport and communications) and social (education, health, sanitation and housing) corresponds to R$ 1.924.4 trillion, which is, almost R$ 2 trillion.

10. Analysis of the rate of inflation in Brazil

In the aforementioned publication of the newspaper Folha de S. Paulo, the IMF analysis on the Brazilian economy, there is the assertion that inflation above target (4.5%) would require an increase in the Selic interest rate to curb consumption. Figure 10 shows the evolution of the inflation rate in Brazil from 1999 to 2011.

Figure 10 - Evolution of inflation in Brazil from 1999 to 2011

Source: http://agenciabrasil.ebc.com.br/noticia/2012-01-06/ipca-fica-no-teto-e-meta-de-inflacao-e-cumprida-pelo-oitavo-ano-seguido

One of the questions from the IMF on the Brazilian economy is that with consumption growing faster than production capacity of the country, increase domestic prices fueling inflation and requiring purchases of imported products with the increase in the deficit in foreign transactions (Figure 1).

11. Analysis of the Selic rate

Figure 11 shows the Selic rate from 2000 to 2012.

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Figure 11 - Evolution of the Selic rate

Source: http://www.atireiopaunografico.com.br/2012/10/selic-acompanha-ipca-ou-e-o-contrario.html

The declining trend in the Selic rate recorded from 2003 to 2012 is being reversed at the moment with the federal government's decision to raise it to fight against inflation. The Central Bank of Brazil has set the Selic rate in October 2013 at 9.35%. The increase in the Selic rate impacts negatively on the amount of domestic debt as well as on expenditure of interest and amortization payments amounting to the detriment of the Brazilian economy.

12. Analysis of domestic public debt in Brazil

According to the IMF, the expenses of the Union, states and municipalities account for something close to 40% of GDP. The IMF questions the fact that the government spends more than it collects accumulating debts that are among the world's largest emerging country. Gross debt of Brazil should close the year 2013 at 67% of GDP. Beside Venezuela and China, Brazil is cited by the IMF between economies where there are increasing risks to the budget and debt.

The IMF considers that public debt in Brazil is quite high unlike that preaches the Brazilian government. Figure 12 shows the evolution of the public debt of Brazil from 1994 to 2009. Analysis of Figure 12 reveals that the R$ 62 billion under Cardoso and R$ 687 billion during the Lula government, the public debt may reach extremely high value of R$ 2.24 trillion in 2013 during the government of Dilma Rousseff.

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Figure 12 - Evolution of domestic public debt in Brazil

Source : http://reflexeseconmicas.blogspot.com.br/2013/04/aumento-da-taxa-basica-selic-e-um.html

13. Analysis of the general budget of the federal government and the allocation of public spending

The evolution of the general budget of the Union with the allocation of expenses from 1995 to 2011 is shown in Figure 13 below.

Figure 13 - Evolution of the general budget of the Union with the allocation of expenses

Source: http://candidoneto.blogspot.com.br/2012/07/nao-ao-terrorismo-contra-os-servidores.html

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Note about the meaning of the chart colors: dark blue color= interest and amortization of debt; green color = social security and welfare; garnet color = personal and social charges; red color = health and sanitation; light blue color = education and culture

Analysis of Figure 13 reveals that there has been growing allocation of budget resources for the payment of interest and amortization of domestic debt. The use of funds from the budget of the Republic established in 2013 is shown in Figure 14 below:

Figure 14 - Allocation of funds from the EU budget in 2013

Source: http://almocodashoras.blogspot.com.br/2013/02/divida-publica-consome-metade-do.html

Analysis of Figure 14 reveals that the largest expenditures of the Brazilian government in 2013 will be interest and amortization of debt (yellow in the graph) which corresponds to 43.98% of the budget, on social welfare (green in the chart) that corresponds to 22.47% of the budget and transfers to States and Municipalities (blue in the chart) which corresponds to 10.21% of the budget.

In addition to the high expenditure on the servicing of public debt, high interest rate Selic adopted by the Central Bank of the federal government, the fifth largest in the entire world economy, as well as the growing public sector deficit decisively contribute to the continued increase public debt in Brazil. Maintained the tendency to allocate more funds for the payment of interest and amortization of debt, there will be fewer resources available by the government (federal, state and municipal) to invest in economic and social infrastructure.

14. Analysis of the creditors of Brazil's domestic debt

Figure 15 shows the creditors of Brazil's domestic debt.

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Figure 15 - Creditors of Brazil 's domestic debt

Source: http://www.viomundo.com.br/denuncias/maria-lucia-fatorelli.html

If there isn´t a reversal of the trend in domestic public debt and payment policy of interest and amortization, the imbalance between demand and availability of resources to meet the needs of Brazil in economic and social infrastructure will be accentuated with the passage of time to the detriment of the population and the national productive sector. For the Brazilian government have resources for investment in economic and social infrastructure, it will be necessary to renegotiate with the domestic and foreign banks (creditors of 55% of debt), mutual funds (21 % of the creditors of debt), pension funds (creditors of 16% of debt) and non-financial companies (creditors of 8% of debt) to get the reduction of expenses with the payment of debt service and the lengthening of the payment of interest and amortization of debt.

15. Analysis of Brazil's foreign debt

Besides the domestic public debt, there is also the existence of a massive foreign debt amounting to US$ 357.2 billion in January 2011. There is a misperception on the part of the population that external debt based on just released official propaganda that have it reset. Figure 16 below shows the falsity of the official propaganda.

Analysis of Figure 16 shows that external debt has stabilized from 1997 to 2005. From 2005 to 2010, external debt increased again significantly from US$ 190 billion in 2006 to US$ 350 billion in 2010. The total external debt for August 2013 totaled US$ 311.5 billion according to Central Bank data.

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Figure 16 - Evolution of Brazil's foreign debt (US billion)

Source : http://pibloktok.blogspot.com.br/2011/03/divida-publica-o-tsunami-do-brasil.html

16. Analysis of the crisis of public sector management in Brazil

The fact that almost half of the budget of federal government will be allocated in 2013 to the payment of interest and amortization of internal and external debt with a tendency to grow in the coming years will result in the increasing inability of the Brazilian government at all levels (federal, state and municipal ) to invest in solving the problems of economic and social infrastructure and to promote the development of the country. This will cause the Brazilian government to attract foreign capital further increasing their dependence on outside. In other words, besides having as consequence the denationalization of the Brazilian economy through the adoption of this measure, it will profoundly affect the development of Brazil that will have the necessary resources to its economic growth and overcoming their regional inequalities.

Due to insufficient funds, the federal government, states and municipalities face severe financial crisis that many of them will be driven to bankruptcy. This problem adds to management crisis in the public sector at all levels (federal, state and municipal) due to inefficiency and ineffectiveness of organizational structures that contribute to the generation of waste of public resources of all kinds. This situation can only be overcome with the implementation of the reform of the State and Public Administration of Brazil to contribute to the implementation of a model of efficient and effective management to the Brazilian state based on the rationalization of work processes. The effects of these measures would reduce the operating costs of the state and, consequently, the tax burden on taxpayers.

Without putting into practice this set of measures, the Brazilian government will not acquire the ability to invest in the expansion of the economy and adopt policies for social compensation at the level necessary to mitigate social inequalities in Brazil. To be successful in implementing these strategies, it is important that the Brazilian state is structured in network which is a kind of overall organizational structure that operates according to a logic chart circular or star-shaped, the center of which is the lead organization. Around this main organization (federal government) are several other entities (state governments, municipalities and state and public enterprises) that would articulate with the first. The operation of this type of organization usually relies on

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modern computer systems and telecommunications that enable centralized management and control of all processes.

The adoption of network structure is imposed in Brazil because the organizational structures of government at all levels are exceeded. It is unacceptable that the structures of federal, state and municipal have efforts superimposed, as still happens today in many sectors , depleting the scarce resources available to them. To solve this problem, it would be necessary to make the federal and state governments to assume regulatory functions and overall planning, regional and sectoral bases integrated, while the municipal authorities, regional development agencies and state and the public enterprises would execute the work also articulated manner.

It should be noted that the State in Brazil is inefficient and ineffective due to the lack of integration of federal, state and municipal in promoting national, regional and local development. Join this fact the existence of inadequate organizational structures in each of the federal, state and local efforts that prevent these integrative levels of government. The lack of integration of the various bodies of the state is therefore complete, making the action of the government becomes chaotic as a whole, generating therefore diseconomies of all kinds.

Compete, therefore, to municipal governments, the regional development agencies and state and public enterprises a big responsibility to put in place all development plans global, regional, state, local and sectoral jointly developed by various government bodies after listening parliaments in their federal, state and local, as well as civil society. This model of integrated management of the public sector in Brazil would be in opposition to what prevails today, in which federal, state and municipal governments are autonomous in their decisions and actions, and politically responsive to the idea of integration.

17. Analysis of regional inequalities in Brazil

The Brazilian government should restructure to acquire the ability to promote the development of Brazil and overcome regional inequalities and social and environmental conditions. Regional inequalities in Brazil are very high. The Southeast region accounts for 59 % of Brazil's GDP, while the southern region participates with 16 %, Northeast with 13 %, the Midwest region with 7 % and North with 5 %. There is an excessive economic concentration in the Southeast region of the country. To overcome regional inequalities requires governmental policies of fiscal and financial incentives to decentralize the Brazilian economy by promoting investment in all regions of Brazil, especially in the North and Northeast. But for this to happen, it is indispensable that the state in Brazil to recover its investment capacity not only to invest in the infrastructure of the less developed regions, but also provide incentives for the private sector to feel attracted to invest in them. Another indispensable political concern is the implementation of a reform of the State and Public Administration in Brazil that would contribute to the formation of structures of regional development that would have the key role to integrate the actions of federal, state and municipal governments in promoting economic, social and environmental development in each region, in each state and in each county.

18. Analysis of social inequalities and environmental problems in Brazil

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The inability of the Brazilian government to promote the country’s development, investing in the solution of problems of social infrastructure and to overcome regional disparity contributes to the worsening of their social and environmental problems. Brazil is characterized today by the maldistribution of income shown in the fact that 20% of Brazil's richest be the holder of 67 % of national income and the poorest 20 % own only 2 % of national income. Another feature is the precariousness of public education, health, public transport and housing in Brazil with high deficits is cause to be positioned in last place in the world as a provider of such low quality public services to the population. To complete the grave social situation of Brazil noted the existence of high crime in the country that has the highest rates in the world with an annual rate of about 22 homicides per 100,000 inhabitants while the United States and France, considered examples, recorded six murders and 0.7, respectively.

Brazil has also serious problems related to the environment such as pollution of air, rivers, lakes, seas and oceans, soil and contamination caused by incorrect disposal of garbage, burned in woods and forests as a way to expand areas for grazing or agriculture, deforestation and illegal logging of trees for timber trading and disposal of waste, among others. It should be noted that Brazil is the 4th largest polluter on the planet and is responsible for 5.4% of global emissions of greenhouse gases. Almost 25 % of national emissions are coming from modern industry and agriculture, and 75 % come from traditional agriculture and logging inefficient or predatory. 75.4 % of emissions of greenhouse gases in Brazil results from deforestation and fires, 22 % of fossil fuel combustion, 1.6 % of industrial processes and 1 % from other causes. All this requires the adoption of strategies that include measures to prevent and mitigate the various forms of aggression to the environment throughout the national territory.

19. External and internal vulnerabilities of Brazil and the most recommended strategies to overcome them

From the foregoing, it can be concluded that Brazil has huge internal and external vulnerabilities that are demanding profound changes in the economic policy of the country. Maintaining the current policy is extremely harmful to Brazil because with the passage of time its future will be compromised. It is therefore important to adopt strategies that contribute to overcome the internal and external vulnerabilities existing in Brazil.

External vulnerabilities of Brazil with the most recommended strategies are:

1) Decline in trade balance

Strategies: a) To adopt a policy of import substitution to reduce expenditures for the purchase of inputs, raw materials, products and services abroad; and, b) To establish the fixed exchange rate as governmental policy to exercise control of foreign trade by reducing spending on imports and increasing export revenues.

2) Deficit in the balance of payments on current account

Strategies: a) To adopt the policy of import substitution producing internally what is imported; b) To restrict the remittance of profits and dividends from foreign companies; and, c) To limit spending of Brazilians in international travel.

3) Dependence on foreign capital for investment

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Strategies: a) To increase public saving renegotiating with creditors debt lengthening of the payment of interest and amortization; b) To increase fiscal surplus by reducing the cost of government spending and the Selic rate to lessen the burden of paying of the public debt; and, c) To raise the domestic private sector savings by reducing the tax burden, the interest rate Selic and "spread" banking.

4) Floating Exchange Rate

Strategy: To adopt the fixed exchange rate as governmental policy to exercise control of foreign trade by replacing the floating exchange rate policy that is based on market laws and relies almost exclusively on variables that are not under government control, such as the growth of world economy impairing the national development.

5) Growth of external debt

Strategy: To lengthen the payment of interest and amortization of external debt renegotiating with creditors to the government have the resources for investment.

Internal vulnerability of Brazil with the most recommended strategies are:

1) Low economic growth

Strategies: a) To develop investment plans covering all regions of the country for exploitation of natural resources in the fields of energy (hydropower, wind farms, solar power plants, biomass, oil in off-shore pre-salt), mineral, agricultural and industrial; b) To fight against inflation encouraging public and private investment in increased production of goods and services in Brazil in a position to meet the demand and to adopt a fixed exchange rate to prevent inflation by importing raw materials, supplies and products; c) To adopt the policy of import substitution producing internally what is imported; d) To structure the development axes economically integrating together the poles of growth and national development; and, d) To structure the Brazilian state network with a profound reform of the State and Public Administration in Brazil.

2) Excessive government domestic debt

Strategies: a) To reduce the Selic rate; and, b) To lengthen the payment of interest and amortization of debt renegotiating with creditors (domestic and foreign banks, investment funds, pension funds and non-financial companies) for the Brazilian government have resources for investment in economic (energy, transport and communications) and social (education, health, sanitation and housing) infrastructure.

3) Insufficient government savings for investment in infrastructure

Strategies: a) to lengthen the payment of interest and amortization of domestic debt renegotiating with creditors (domestic and foreign banks, investment funds, pension funds and non-financial companies) for the Brazilian government have resources for investment in economic (energy, transport and communications) and social (education, health, sanitation and housing) infrastructure; b) To lengthen the payment of interest and amortization of external debt renegotiating with creditors to the government have the resources for investment; c) To reduce the maximum spending of public funding for the government to have a fiscal surplus required to pay the service of domestic and foreign debt and resources for investment in economic (energy, transport and communications) and social (education, health, sanitation and housing) infrastructure.

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4) De-industrialization of Brazil

Strategies : a) To adopt an industrial policy promoting the effectiveness with falling tax burden and improving the logistics infrastructure in Brazil, to increase productivity in the industry with the elevation of its levels of efficiency and effectiveness and to strengthening their supply chains and to relief selective and permanently the industry with the reduction of the tax burden in it incident; b) To overcome the gigantic problems of education in Brazil at all levels; c) To develop knowledge resources by adopting programs to implement R&D centers, new institutions of education, technology acquisition and attracting of brains from abroad; d) To adopt adequate allocation of infrastructure resources establishing effective programs to eliminate bottlenecks; e) To encourage links between the supply chains of companies and their suppliers to eliminate gaps; and, f) To combat predatory competition of imported products with the restriction or limitation of its entry into the domestic market.

5) Denationalization of the Brazilian economy

Strategy: a) To adopt industrial and macroeconomic policy aimed at protecting the Brazilian company in the confrontation against the foreign company established in Brazil and against imported products; and, b) To adopt a government policy favoring purchases of goods and services from Brazilian companies domestically.

6) Brazil Cost

Strategies : a) To combat corruption endemic in the Brazilian public sector whose annual cost is around 41.5 and 69.1 billion dollars and to carry out political reform and a reform of the state and public administration through a Constituent Assembly exclusive; b) To reduce or eliminate the public deficit; c) To adopt measures to reduce real interest rates, the "spread " banking, labor costs, costs of the pension system and the costs of electricity; d) To simplify tax law; e) To solve the problems of infrastructure related to blackouts in the electricity sector and saturation of ports, airports, roads and railways; f ) To adopt measures for higher qualification of the workforce; g) To reduce dramatically the tax burden by lowering the items of expenditure of the government and the public debt burden with decreasing Selic interest and conducting a thorough reform of the state and public administration in Brazil; h) To make drastic reduction of public debt with lower rates of Selic interest; i) To eliminate the bottleneck with logistical incentives for public and private investments in infrastructure of energy, transport and communications, and , j) To deploy organizational network in the Brazilian state to raise levels of efficiency and effectiveness of public administration in Brazil.

7) Regional inequalities in Brazil

Strategies: a) To adopt fiscal and financial policies of government incentives to decentralize the Brazilian economy by promoting investment in all regions of Brazil, especially in the North and Northeast; b) To recover the investment capacity of the Brazilian government not only to invest in the infrastructure of less developed regions, but also provide incentives for the private sector to feel attracted to invest in them; and, c) To conduct a State and Public Administration Reform in Brazil that contributes to the formation of structures that have the regional development role essential to integrate the actions of federal, state and municipal promotion of economic, social and environmental.

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8) Worsening of social and environmental problems of the country

Strategies: a) To strength civil society organizations so that they can press the holders of economic power and the government to make concessions of social nature that will result in improved income distribution in Brazil, covering also its participation in the design of government policies of national development; b) To invest in improving the infrastructure of education, health and sanitation and public transport system; c) To increase the supply of affordable housing to meet the demands of society; d) To adopt a policy of prevention and combat crime by providing most of the population of the minimum means of survival as employment, education, health and housing, as well as restructuring the police and the courts to exercise fight crime without the disproportionate use of violence; and, e) To take measures to prevent and mitigate the various forms of aggression to the environment throughout the national territory.

9) Management crisis in the public sector at all levels (federal , state and municipal)

Strategies: a) To prepare development of global , regional , state, local and sectoral plans with the participation of various government bodies after listening parliaments in their federal, state and municipal levels as well as civil society; b) To implement a model of efficient and effective management to the Brazilian state based on the rationalization of work processes; c) To structure the Brazilian state network supported by modern computer systems and telecommunications that enable centralized management and control of all processes; and d) To make the federal and state governments to take global, regional and sectoral regulatory and planning functions in integrated bases, while the municipal governments, regional development agencies and state and the public enterprises the executive function. * Alcoforado, Fernando, engineer and doctor of Territorial Planning and Regional Development from the University of Barcelona, a university professor and consultant in strategic planning, business planning, regional planning and planning of energy systems, is the author of Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona, http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development-The Case of the State of Bahia (VDM Verlag Dr. Muller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (P&A Gráfica e Editora, Salvador, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011) and Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), among others.