Critics Say Brazil Reform May Hurt

Brazil’s new constitution, to be promulgated Wednesday, makes major changes in the rules of finance, business and labor that some critics predict will hamper private investment and economic development.

Drafted by the national Congress over 19 months and passed by a final vote in September, the constitution grants a series of expensive new benefits to labor, restricts opportunities for foreign companies in Brazil and sets a ceiling of 12% on real annual interest rates. Together, those measures have triggered a steady barrage of public criticism from private sector leaders, pro-business politicians, economists and the news media.

“The charter has its unconditional defenders, but almost everyone thinks that on the economy the document is a disaster,” Veja, Brazil’s biggest news magazine, said.

Among constitutional provisions benefiting employees are a vacation pay bonus of 30%, a maternity leave increase to four months from three months, the right to company-paid child care for preschool dependents, reduction of the standard work week from 48 hours to 44, reduction of work shifts from eight hours to six in factories that operate around the clock and an increase in overtime pay from time-and-a-quarter to time-and-a-half.

Critics predict that some companies will pass higher labor costs on to consumers by raising prices, while others will absorb the higher costs by investing less and creating fewer jobs. Many small retail businesses are expected to have serious trouble reducing the workweek of their employees to 44 hours or paying them time-and-a-half for overtime.

‘Inflationary Shock’

Economic studies of the new labor benefits have indicated that if employers maintain work forces and production at current levels, their costs will increase by an average of about 35%.

“Those who can will simply pass those increases on in the prices of their products and services, thus provoking an enormous inflationary shock,” said a report by economists Jose Pastore and Helio Zylberstajn of the University of Sao Paulo.

There is some fear that the labor benefits may backfire against the job market, encouraging hiring freezes, layoffs and automation. For example, a large automotive parts maker has frozen hiring of women until it analyzes the costs of the new maternity benefits.

Sen. Roberto Campos, a former planning minister and a conservative leader in the Congress, has called the new constitution “a text that distributes guarantees, duties and benefits without concern for efficiency and productivity.”

Campos also criticizes the constitution’s treatment of foreign capital. “While the entire world opens its doors to foreign capital, Brazil has decided to bar the gates of its economy,” he said.

The constitution says that in buying goods and services, the government “will give preferential treatment to the national company,” which is defined as any in which the majority of voting stock is held by persons living in Brazil.

“That is absurd and it creates a cartel,” said Antonio Ermirio de Moraes, chief executive of Grupo Votorantim, a huge mining, metal and chemicals conglomerate.

The constitution also says that only national companies may prospect and exploit mineral resources in Brazil. Foreign companies now operating in Brazil will have five years to put their mineral holdings under Brazilian control.

Major Tax Hikes Feared

Jose Bastos, director of the National Department of Mineral Production, said that provision could reduce investment in prospecting and lead to “mineral impoverishment” for Brazil. Bastos said Brazilian companies will be unable “to fill the vacuum left by the departure of foreign capital, responsible for 57% of the mineral prospecting of Brazilian subsoil.”

The constitution also changes taxes on mineral production, raising fears of major tax increases. High taxes on minerals could create “an unfavorable climate for investment,” said Jose de Souza, executive secretary of the Brazilian Mining Institute.

In prospecting for oil, the government petroleum monopoly is prohibited from awarding “risk contracts” to foreign companies under the new constitution.

“No one should be surprised to see investors leaving Brazil if everything is being done to frighten them away,” Martin Bangemann, West Germany’s economics minister, said during a recent visit to Brazil.

Some of the constitution’s provisions will not go into effect until the Congress passes enabling legislation. A controversy has arisen over whether enabling legislation is needed to enforce the 12% cap on annual interest rates.

Critics say the interest limit will be impossible to enforce because it attempts, as the newspaper Gazeta Mercantil said, “to revoke one of the basic principles of any economic manual: the law of supply and demand.” Others fear that the measure will cause havoc in financial markets.