Brazil is considered to be one of the ten largest nation in the world with regard to area, population and GDP (gross domestic product). Over a third of all South-American economic power relies on this country, which has considerable reserves of raw materials, a broad base of production and a partly highly developed industrial structure.

On January 1, 2003, President Lula da Silva assumed control of a country that - to a great extent - was politically and economically stable and following the reforms introduced by his predecessor Cardoso, which focused on a free economic order, the protection of human rights and close international cooperation. However, other extensive political, social and economical reforms will be necessary to eliminate the existing structural problems posed to development and to the achievement of a wide modernization of the country, in which the entire population can participate.

Brazil is a federal presidential republic. The head of state and also head of government is the President, who is elected through direct ballot by the people for a four-year mandate(and is eligible for reelection only once). The Vice-President is elected at the same time. At the federal level, the Legislative Power is exercised by the National Congress, which is composed of two houses. The Chamber of Deputies has 513 members and the Senate has 81 (three from each state and the Federal District). At the state and municipal levels, the Executive Power is exercised by governors and mayors and the Legislative Power by the Legislative Assemblies respectively. Most political parties are much more people-oriented than program-oriented. Therefore, political alliances and coalitions can change rapidly and it is not rare that elected officers switch parties. The Judicial Power is divided between the federal and the state court. Those courts have jurisdiction over civil, commercial, administrative and public matters, which are normally resolved in up to three steps. There are also specific courts for labor, electoral and military matters and federal courts for disputes involving the federal government and its institutions. The Supreme Federal Court (Supremo Tribunal Federal) is the highest judicial body and is responsible particularly for federal and constitutional disputes, and for proceedings related to foreign countries. It also judges all litigation brought against members of the federal bodies (such as the President, Ministers, Congress members), whereas cases involving state governors and members of the legislative assembly are under the responsibility of the Superior Court of Justice (Superior Tribunal da Justiça), which is the highest federal judicial body and is composed of three courts. The Brazilian judicial system specifically the Constitution of 1988, is characterized by its complexity and lack of clarity. The courts are known to be overburdened and slow, and qualified attorneys are expensive. Under these circumstances, reaching a common agreement without involving law procedures may be sensible alternative.

The traditional Brazilian political culture is changing. Despite the significant differences that exist between the South and North regions regarding economical and social development, today people involved in politics, mostly the young, push for reforms in economy and society to promote a better-balanced social structure and the modernization of the country in all fields. Civil society with its numerous organizations plays an important role in this respect.

Foreigners might have difficulty to understand the Brazilian scenario. Successful business relationships require knowing the political culture and the potential contradictions between political rights and actual conditions. This includes being particularly aware that, although it is defined by century-old traditional structures, the country is going through rapid changes, both politically and socially.

The Role of the Brazilian Government in the Economy

In the past, the Brazilian government participated on a large scale in the economy with government owned companies and exercised great control over privately owned enterprises. Therefore, excessively detailed and frequently changing regulations where often a reason for complaint in the Brazilian economy, particularly with respect to the monetary and price policies, the rules on import, license regulations and labor law.

There have been significant changes in this regard since 1990. Within the context of a comprehensive privatization program almost all considerable industrial holdings belonging to the Federal Government have been privatized, with very few exceptions. Since 1995 the Brazilian Federal Government and increasingly also its states have become involved in the privatization of infrastructure (transport, energy and telecommunications) and financial services. State monopolies(i.e. telecommunications and petroleum) and restrictions against foreign capital (i.e. mining and financial services) were mostly eliminated.

The privatization that started in 1991 yielded US$ 105.3 billion in proceeds for the state treasury until the end of 2002. This sum was used for the debt relief of enterprises and banks being privatized and to settle the states debts. At the end of Cardoso's era, the state-owned development bank BNDES (Banco Nacional de Desenvolvimento) still had a list of outstanding privatizations that included several energy distributors and generators, water and wastewater companies, telecommunication licenses in several states, the state reinsurance IRB, as well as some state-owned banks.

The BNDES generally has a comprehensive overview of the present situation in all sectors of the Brazilian economy and should be consulted when making investment decisions. Furthermore, it is an important financing resource, since it extends long-term credits, even to foreign investors.

Contrary to other European and American enterprises, the German economy participated very little in the privatization. In order to remedy the matter, in February 2002, German Chancellor Schröder and President Cardoso created a German-Brazilian Workgroup of Infrastructure and Energy, whose objective is to attract German investors, particularly to the still to be privatized segments of the Brazilian economy.

However, privatization came to a standstill in 2002. In the case of the biggest Latin-American energy distributor, Eletropaulo, it even came to a temporary partial nationalization, since BNDES took over 50% of Eletropaulo's shares during a debt restructuring from its head office, the North American AES, in order to pay off credits taken on at BNDES for the purchase. The devaluation of the real, the changes in the behavior of consumes as a result of the 2002 energy crisis and the slow economic growth pattern put energy enterprises which had been privatized to foreign businesses in a difficult position. BNDES wants to take energy enterprises out of the red by restructuring their debt.

The Lula administration thinks that the State should play a more significant role in the economy At the same time, even the Lula administration needs private investors in order to make the investments foreseen in the government's multiannual plan (2004-2007) (www.planobrasil.gov.br). For this reason, the regulation of segments such as energy, telecommunications, transport, etc. will have to be clarified. The intent of the Lula administrations inspect the regulatory authorities created by the previous government for the privatized segments put the investors into a state of uncertainty and provoked a drop in foreign investments Also, the decision made still under the Cardoso administration to suspend the ratification of 14 bilateral investment protection and incentive treaties, among them the one signed with Germany in 1995 and already ratified by the German Bundestag, was not very helpful.
The Lula administration also intends to sell the last four regional banks that were taken over by the Federal Government still under the Cardoso administration and whose debts were relieved. However, first it is necessary to mediate litigation between the Federal Government and the four affected state governments regarding the privatization proceeds. So far, the privatization of the three major federal banks, Banco do Brasil, Caixa Economica and BNDES, has not been planned.

Despite the liberalization, openness and deregulation, the tradition to intervene in the way businesses are conducted through rapid and detailed measures remains. The country's enormous area, regional diversity and social problems represent a challenge to the state administration Problems, such as the lack of personnel continuity or parallel authority structures with unclear competences and insufficient coordination also interfere by posing insecurity to investments planning and showing that often even in well-organized parts of the country the administration can still be improved. The Brazilian government is aware that these are big challenges that need to be faced.

Mercosur

The creation of the Common Market of the South (Mercosur) on January 1st, 1995, brought a new dimension to the development of Brazil. Mercosur goes back to 12 bilateral protocols between Brazil and Argentina dated of 1986, which in 1988 were transformed in an agreement on integration, cooperation and development with the objective of creating a common market between both countries within 10 years. After Paraguay and Uruguay joined, all four countries signed an agreement in 1991 on the creation of the Mercosur in order to obtain a free trade area of goods and services, a common customs tariff and a unified commercial policy towards other countries. The agreement also had the purposed of coordinating these country's economic policy.

Since January 1st, 1995, the internal duty has been abolished for more than 90% of all goods produced in the member countries and the remaining internal duties are supposed to be completely abolished by the year 2006. Also, a common customs tariff was introduced for the majority of goods.

Chile, Bolivia and Peru have also joined, and negotiations are being held with other Latin American countries.

Until 1997, Mercosur's success led to a significant expansion of the trade between its member countries and influenced the economic planning and investment behavior of enterprises in all South America.

Since then, however, the integration process has been very slow. First, the different monetary and exchange rate policy of large member countries, such as Brazil and Argentina led to strong tensions. After the devaluation of the Brazilian currency real in January 1999, Argentina introduced protective duties in order to defend itself against the cheap imports from Brazil. Also, Argentina undermined the common customs tariff through numerous special regulations.

However, since the Argentinean peso has no longer been pegged to the dollar (end of 2001), the conflict regarding the monetary policy was eliminated. Once again, Argentina bets on the cooperation in the Mercosur. Although the severe 2002 economic crisis in Argentina provoked a significant drop in the Mercosur trade, the revival of the Argentinean economy reconsolidated the Mercosur trade in 2003. Moreover, the foreign policy of the Lula administration is geared towards the Mercosur and Latin America. In order to further the regional integration even resources from the state-owned development bank, BNDES, have been made available.

The Brazilian industry - including large German companies - is pressuring the Brazilian government to sign agreements with countries outside the Mercosur in order to open new export markets. Brazil has already negotiated free trade agreements with Chile and Mexico, which can come into force with the authorization of the other Mercosur members.

Mercosur has an office in Montevideo. In February 2002, as a first step in creating supranational structures, a (virtual) court of arbitration was established. This complies with what Brazil, as a Mercosur member has been demanding for many years.

Since November 1999, the EU is conducting negotiations with Mercosur regarding an association agreement that, besides a trade segment, should also include political and cooperation segments. On July 5th, 2001, the Commission handed a comprehensive proposal for the gradual elimination of tariff and non-tariff hindrance to trade over to the Mercosur. In November, Mercosur made a counter offer. In February 2003, both parties improved their original offers, and negotiations are to be concluded by 2005. Until then, a Free Trade Agreement of the Americas (FTAA/ALCA) is supposed to be signed, whereas particularly Brazil and USA disagree with its structure.

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