This paper analyzes several issues regarding fiscal sustainability and fiscal adjustment in Brazil during 1990 and searches for econometric evidence of a monetary dominant regime during some subperiods. The following statistical data are also presented in detail: macroeconomic flows and balances, industrial production, consumer price index, relative public sector prices and tariffs, minimum wage statistics, financial system loans, monetary aggregates, exports by principal commodity groups, direction of trade, detailed balance of payments, total external debt, central government operations, and so on.


This paper analyzes several issues regarding fiscal sustainability and fiscal adjustment in Brazil during 1990 and searches for econometric evidence of a monetary dominant regime during some subperiods. The following statistical data are also presented in detail: macroeconomic flows and balances, industrial production, consumer price index, relative public sector prices and tariffs, minimum wage statistics, financial system loans, monetary aggregates, exports by principal commodity groups, direction of trade, detailed balance of payments, total external debt, central government operations, and so on.

IX. Foreign Direct Investment and Transnational Enterprises in Brazil1

A. Introduction

1. Brazil was the second largest recipient of foreign direct investment among developing nations during the 1990s (behind the People’s Republic of China), with total inflows amounting to approximately US$97 billion. This impressive performance was far from homogeneous over time, and this section identifies two main phases characterizing FDI inflows to Brazil during the decade. The period 1990–94 was marked by the beginning of important structural reforms that affected the quality but failed to immediately increase the amount of FDI inflows in a substantial manner, due to the unfavorable macroeconomic environment dominated by very high inflation rates. Foreign direct investment in this period reflected mainly the restructuring and modernization of transnational enterprises already established in the Brazilian manufacturing sector. In contrast, the period 1995–99 marked the deepening of the structural reform process which, combined with improved macroeconomic conditions, significantly boosted the level and altered the composition of FDI inflows to Brazil. In this phase, and particularly with the stimulus of the privatization of public utilities, the service sector became the leading destination of foreign direct investment inflows.

2. Following a discussion on the two subperiods defined, the section reviews some of the important issues associated with the impact of transnational enterprises in the Brazilian economy. Notwithstanding the lack of consistent data set on the subjects of FDI and the performance of transnational enterprises, available information supports the views that:

  • the level of FDI should remain robust beyond the horizon of the privatization program to the extent that the efficiency, and thus the potential GDP growth of the economy have increased, improving the prospects for investors;

  • transnational enterprises in Brazil’s manufacturing sector have been giving increased importance to exporting their products;

  • transnational enterprises contribute to increase the productivity of the economy; and

  • the overall impact of FDI and transnational enterprises on the external accounts was positive in 1995 (the only year for which detailed data are available).

B. The Beginning of Reforms and the Characteristics of FDI in 1990–94

3. FDI inflows averaged only US$1.6 billion or 0.2 percent of GDP per year between 1990–94. Despite these modest results, which may be ascribed mainly to macroeconomic instability and political uncertainty, the period was important to the extent that it marked the start of structural reforms that contributed to the subsequent rise in FDI inflows to Brazil.

Several measures were adopted to reduce the red tape for investment registration and profit repatriation, increase transparency, eliminate restrictions on some types of foreign investment, and reduce the discriminatory treatment against foreign capital in some areas of taxation.2 In addition, a privatization program was introduced and import tariffs were reduced substantially (Figure 9.1).

Figure 9.1.
Figure 9.1.

Brazil: Average import tariffs

Citation: IMF Staff Country Reports 2001, 010; 10.5089/9781451805901.002.A009

4. The immediate impact of these reforms was to spur a process of restructuring and modernization carried out by transnational enterprises already established in Brazil that worked to improve their competitive position in the domestic market as well as in the recently created Mercosur.3 In this regard, the reduction of tariffs was particularly important to the extent that it lowered the cost of imported capital goods while simultaneously signaling the threat of greater competition from foreign products.4 The success of this modernization strategy and the increased emphasis on the external market is attested by the fact that the value of manufactured exports of transnational enterprises increased by 65 percent during the first half of the 1990s, against only 36 percent for Brazilian enterprises.5

5. The aforementioned restructuring of existing transnational enterprises was the dominant force driving FDI inflows to Brazil in 1990–94, since the macroeconomic instability rooted on extremely high inflation rates discouraged the establishment of new transnational enterprises. Privatization-related foreign inflows were also comparatively small, as the privatization program began under severe restrictions to foreign capital participation. For example, foreigners could only buy a maximum of 40 percent of a company’s voting shares, foreign capital had to remain in Brazil for a minimum of 12 years, and shares purchased in privatization auctions could not be sold for two years. Thus, because transnational enterprises already established in Brazil were responsible for the bulk of FDI flows in 1990–94, these inflows reinforced the historic dominance of manufacturing as the main sector of destination, and the United States, Germany, Switzerland, and Japan as the main origin of FDI flowing into Brazil until the mid-1990s.

C. The Characteristics of the Stock of FDI in Brazil in 1995

6. The central bank published in 1998, for the first time, a comprehensive Census of Foreign Capital in Brazil (hereafter “the census”) with detailed information on the stock of FDI and the characteristics of transnational enterprises in Brazil based on data collected until 1995. The census shows that the presence of transnational enterprises until 1995 was stronger in manufacturing, where 55 percent of the total stock of FDI was concentrated, followed by the service sector with 44 percent, and agriculture with less than 2 percent of the total stock of FDI.6 Within the manufacturing sector, chemicals, automobile, and steel production were among the main activities. The origin of foreign investments was broadly diverse, with the United States being responsible for approximately one-fourth of the total, followed by Germany, Japan, and Switzerland; interestingly, countries considered to be “fiscal havens” accounted for about 7 percent of the total stock of FDI in Brazil in 1995 (Figure 9.2).7

Figure 9.2.
Figure 9.2.

Brazil: stock of FDI by country of origin, 1995

Citation: IMF Staff Country Reports 2001, 010; 10.5089/9781451805901.002.A009

7. It is estimated that transnational enterprises owned about 11 percent of the total stock of capital and were responsible for 13½ percent of total Brazilian output in 1995.8 Another measure of the participation of transnational enterprises in the economy, in a sample of more than 200,000 companies registered with the Tax Administration Bureau, revealed that transnational enterprises accounted for 16 percent of total operating revenues of all companies together—considering the manufacturing sector alone, this share increases to 34 percent. Some activities in the Brazilian economy stood out for the strong presence of transnational enterprises, such as the tobacco industry (where 98 percent of total operating revenues were generated by transnational enterprises), the automobile industry (88 percent), office and computer equipment (69 percent), chemicals (56 percent), and electric equipment (50 percent).9

8. The output of transnational enterprises is fairly concentrated, with the largest 10 companies accounting for 20 percent of total revenues obtained by all transnational enterprises operating in Brazil in 1995. Also, due to the predominance of manufacturing as the main sector of destination of FDI and accompanying the heavy concentration of the Brazilian industrial production in the State of São Paulo, 60 percent of the total assets of transnational enterprises were in that state in 1995. Finally, transnational enterprises were responsible for almost 28 percent of the total tax revenue and for about 17 percent of Brazil’s total stock of external debt in 1995.

D. The Boom of FDI in the Period 1995–99

During the second half of the 1990s, FDI inflows to Brazil soared, rising from US$5.5 billion or 0.8 percent of GDP in 1995 to US$30 billion or about 5.7 percent of GDP in 1999 (Figure 9.3). Although this result is partially associated with the general increase of FDI to developing nations during the period, flows to Brazil grew more than proportionally, taking Brazil from fifth to second place among the largest recipients of FDI in the developing world. Brazil’s success in attracting foreign investors in this period can be attributed mainly to the continuation of the reforms, which further reduced the tax burden on foreign capital and expanded the privatization process, and the economic stabilization after the Real Plan. The consolidation of Mercosur also stimulated transnational enterprises to establish or increase production capacity in Brazil, thereby taking advantage of economies of scale to compete in the domestic and external markets.

Figure 9.3.
Figure 9.3.

Brazil: Foreign Direct Investment

Citation: IMF Staff Country Reports 2001, 010; 10.5089/9781451805901.002.A009

9. A substantial amount of FDI was attracted to Brazil to participate in the privatization program during the second half of the 1990s. Instrumental for these capital inflows was the approval, in 1995, of legislation eliminating public monopolies and regulating the granting of concessions to private companies in some key utility sectors, which allowed the privatization program to be extended to areas such as telecommunications and the generation, transmission, and distribution of energy. The elimination of limits to foreign ownership in privatized companies was another fundamental step toward increasing FDI inflows. In addition to privatization, competition in the sectors previously dominated by state monopolies has been fostered by granting concessions to new private companies, which has spurred a new round of FDI inflows, notably in telecommunications. Reflecting the heavy participation of foreign capital in the privatization of public utilities, the sectoral distribution of FDI has been changed considerably from its historical pattern, with the recent predominance of inflows into the service sector (Table 9.1).

Table 9.1.

Brazil: FDI Composition by Sector

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10. This is not to say, however, that the performance of the traditional manufacturing sector has suffered. To the contrary, strong flows into manufacturing raised the sector’s stock of FDI by approximately 40 percent between 1995–99.10 Even though many new foreign companies installed production units in Brazil, notably in the automobile sector, foreign investment in manufacturing continued to be dominated by previously established transnational enterprises, which accounted for at least 60 percent of total manufacturing FDI in the period.11 Most of these investments went into the production of durable goods (automakers alone were responsible for 26 percent of total FDI in manufacturing) stimulated by buoyant demand and competitive pressures from imports which were intensified by the real exchange rate appreciation after 1994.12

E. The Performance of FDI in 2000

11. The latest data available indicate that foreign direct investment in Brazil remained strong through August 2000, with accumulated inflows of US$20.1 billion or about 5 percent of estimated GDP. Most of these flows continue to go into the service sector, although the share of services in total recent FDI inflows has declined accompanying a decrease in privatization-related inflows which responded for only 10 percent of total FDI inflows during the first semester of 2000. Within services, telecommunications and energy are still the main destination of FDI, which probably reflects the substantial followup investments of the companies privatized in the last three years. Internet services have also attracted a substantial amount of new investments, as foreign companies try to establish themselves in the large and relatively incipient Brazilian market. The United States continue to be the main origin of FDI coming to Brazil.

F. The Sustainability of Foreign Direct Investment Inflows

12. The substantial amount of FDI that came to Brazil because of foreign participation in the privatization process during the last few years raises the question of how sustainable FDI inflows will be as the bulk of the privatization program is concluded. This section describes the direct impact of privatization on FDI, showing that it has not been the main source of FDI inflows, and argues that the main impact of privatization on foreign direct investment (as on investment in general) is an indirect one that should last beyond the duration of the privatization program.

13. Privatization-related FDI inflows have amounted to approximately US$23 billion since 1996, which is equivalent to a little more than one-third of total FDI in the period. Excluding privatization inflows, the amount of FDI is therefore still high and, perhaps more importantly, has been rising continuously (Figure 9.4). During the first eight months of 2000, for example, FDI, excluding privatization, amounted to a record US$17.6 billion or approximately 4½ percent of estimated GDP, a level more than sufficient to cover the entire current account deficit in the period.

14. The fact that FDI inflows excluding privatization have always been greater than privatization-related inflows and have increased continuously since 1996 suggests that the main impact of the privatization program on foreign investments is not a direct one. Instead, by signaling greater economic efficiency, especially in the recently privatized and strategic areas of public utilities and telecommunications, the privatization program has improved the outlook for economic growth and profitability, thus stimulating investment. Empirical evidence supporting this argument is provided by Sader (1993), who used a sample of 21 low and middle income countries to estimate a model in which nonprivatization FDI is positively (and significantly) affected by privatization. Therefore, to the extent that it increases potential GDP growth, privatization should continue to attract foreign investments beyond the duration of the privatization program.13

Figure 9.4
Figure 9.4

Brazil: FDI Excluding Privatization-Related Inflows

(in Percent of GDP)

Citation: IMF Staff Country Reports 2001, 010; 10.5089/9781451805901.002.A009

G. Transnational Enterprises and the External Accounts

15. The impact of transnational enterprises on the external accounts has traditionally been a source of intense debate in Brazil.14 The subject has deserved increasing attention in the wake of the record FDI inflows observed in the last few years. Some critics of the internationalization of the Brazilian economy have argued that transnational enterprises weigh negatively in the country’s external accounts because of their profit remittances, greater propensity to import, and the low export coefficient which would follow from the fact that the large domestic market has been the main motivation for these enterprises to establish in Brazil. These concerns, however, are not supported by the data available.

16. According to the census, transnational enterprises had a positive trade balance amounting to some US$2.3 billion in 1995, being responsible for 41 percent of Brazil’s total exports and 39 percent of total imports. The relevance of these numbers increases when compared to an overall trade deficit of about US$3.5 billion posted by Brazil that year. Also in 1995, profit remittances amounted to US$3.1 billion (the equivalent to 7½ percent of the total estimated stock of FDI), and considering the net FDI inflows of about US$4 billion, the overall contribution of transnational enterprises to the Brazilian external accounts in 1995 was positive.

17. While the same detailed data are not available for more recent years, some general trends of the impact of transnational enterprises on the external accounts can be inferred from other sources. Profit remittances increased sharply until 1998, when they reached US$7.6 billion, partially reflecting the real appreciation of the exchange rate, but have decreased since then, registering US$5.5 billion in 1999 and US$2.4 billion in the first half of 2000 (against US$2.7 billion in the first half of 1999). On the other hand, profit remittances as a proportion of FDI have declined continuously from 64 percent in 1995 to only 18 percent in 1999 and 14 percent in the first half of 2000. Even excluding privatization-related FDI inflows, the ratio of profit remittance to FDI decreased to 26 percent in 1999 and 15 percent in 2000 (Figure 9.5). This ratio is still below the levels observed in the 1970s, suggesting that the favorable trend could continue as the performance of the Brazilian economy improves, as expected, in the years ahead.

18. The recent growth of manufacturing exports has been stronger in activities where the presence of foreign capital is stronger (listed in Paragraph 7), suggesting a positive direct contribution of manufacturing FDI to the latest dynamism of Brazilian exports. For example, the value of exports of automobiles, electric equipment, chemicals, and telecommunications equipment increased by 28 percent, 30 percent, 26 percent, and 160 percent, respectively, during the first half of 2000 compared to the first half of 1999, against an average of 16 percent for all export products. In addition, export activities have been growing in importance within the overall strategy of transnational enterprises in the manufacturing sector, as shown by a qualitative survey in which 76 percent of the transnational enterprises contacted indicated that export expansion is one of their most important strategies for the years ahead.15 The latest data obtained show an increased propensity to export in sectors with heavy participation of foreign capital: between 1990 and 1996, the share of exports in total production rose from 2.2 percent to 16.6 percent in the tobacco industry, from 9.2 percent to 13.6 percent in electric and office equipment, from 5 percent to 7 percent in electronic and telecommunications equipment, and from 6.3 percent to 6.6 percent in transport equipment. Also, the share of export revenues in total revenues of transnational enterprises in Brazil rose from about 8 percent in the 1970s to more than 12 percent in 1995.16

Figure 9.5.
Figure 9.5.

Brazil: Profit and Dividend Remittances

Citation: IMF Staff Country Reports 2001, 010; 10.5089/9781451805901.002.A009

19. On the other hand, the increased participation of foreign capital in nontradable sectors, notably telecommunications, is indeed expected to raise the average coefficient of import penetration while reducing the coefficient of export to revenues of transnational enterprises, thus generating a negative direct impact on the Brazilian current account. This is not to say, however, that the larger flows of FDI into nontradable sectors will exert an overall negative impact on the external accounts. While impossible to quantify, the indirect effect of these investments will be that of significantly raising efficiency and reducing costs in these key sectors, contributing to the reduction of the “Brazil cost,” increasing the competitiveness of the entire economy, and thereby stimulating exports. Some of these effects are already being felt, as described in the following section.

H. Privatization, Foreign Capital, and Efficiency Gains in the Telecommunications and Energy Sectors

20. Foreign capital has become a major participant in the privatization program, being responsible for about 45 percent of total sale proceeds up to date and more than half of the proceeds from privatizations in the telecommunications and energy sectors. Despite the limited availability of data, some indicators obtained provide a general idea of the increased efficiency in these two important sectors that was brought about by the privatization process with significant participation of foreign capital. Between 1997–99, for example, the number of fixed telephone lines and public telephones increased by 50 percent and 60 percent, respectively; the startup cost for a regular phone line was reduced by 60 percent; and the size of the fiber-optic network (key for data transmission) nearly tripled in the same period. In the energy sector, electricity companies privatized until 1998 increased their investments, on average, by approximately 60 percent in the year immediately following privatization; total interruption time of energy supply decreased by 36 percent and the number of consumers affected by these interruptions was 30 percent smaller in 1999 than in 1996.17

I. Transnational Enterprises and the Labor Market

21. A study by Zockun (1999) shows that although transnational enterprises were responsible for less than 2 percent of total employment in Brazil in 1995, these companies paid about 12 percent of the total wages and salaries in the economy. In that same year, the average salary in transnational enterprises was about six times greater and the productivity of labor 7½ times higher than the national average in 1995. Above-average productivity gains were observed in sectors with heavy foreign capital participation during the 1990s. While the productivity of labor in the Brazilian economy increased by about 20 percent from 1990–98, productivity increased by approximately 88 percent in automobile production, 51 percent in the tobacco industry, 83 percent in the chemical industry, 63 percent in the production of electric equipment, and 102 percent in telecommunication services.18


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  • Bielschowski, Ricardo, and G. Stumpo, 1995, “Empresas Transnacionales Manufactureras en Quatro Estilos de Reestructuracion en America Latina: Los Casos de Argentina, Brasil, Chile y Mexico Despues de la Substituicion de Importaciones”, Desarollo Productivo, No. 20, Santiago, Chile: CEPAL/UN.

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Prepared by Claudio Paiva.


For a detailed list of the measures and legislation introduced, see SM/98/27.


For details on the characteristics of FDI investment in the period, see Bielschowski and Stumpo (1995).


A qualitative poll published by Sobeet (2000) showed that 85 percent of the transnational enterprises surveyed mentioned cost reduction via technological modernization as the main motivation to invest during periods of sluggish demand growth. Also, the majority of transnational enterprises indicated that restrictions on access to foreign new technology and tariff barriers are among the leading factors that affect their competitive position.


Sobeet, 1998.


It is recognized that the method of registration of FDI until 1995 biased the composition of investments in favor of the service sector, since investments of enterprises that are part of a “holding” were classified under “enterprise services,” even though these companies performed manufacturing activities. Using disaggregated census data, Sobeet (1998) shows that manufacturing accounted for about 70 percent of total liquid assets and total operating revenues of transnational enterprises.


Fiscal havens here refer to Virgin Islands, Cayman Islands, Bermudas, Panama, and The Bahamas.


Sobeet (1998).


Stocks in 1999 are estimated as the sum of the flows in 1996–99 that is added to the stocks of 1995.


See Laplane and Sarti (1997) and Sobeet (1999).


The ratio of imports to GDP averaged 3½ percent between 1990–94 and 7½ percent in 1995–99; the average share of durable goods in total imports increased from 6 percent to 9 percent between the two periods.


Barnett (2000) also shows that privatization increases GDP growth beyond the horizon of implementation of the privatization program according to a model estimated for 18 countries.


Moraes (1999). It is worth noting that the period 1995–96 may underestimate the average export to revenue ratio of transnational enterprises, as suggested by the poor export performance and buoyant domestic demand observed in those two years, when the export to GDP ratios of the Brazilian economy were the lowest in two decades.


When these data were collected, privatized companies accounted for 72 percent of the energy distribution and 22 percent of energy generation in Brazil.

Brazil: Selected Issues and Statistical Appendix
Author: International Monetary Fund