VII. INVESTMENT CLIMATE - Openness to foreign investment Brazil welcomes foreign investment with some restrictions. Foreign investment is governed by the 1962 Foreign Capital Law and subsequent amendments. The National Monetary Council permitted foreign institutional investors to invest in the Brazilian stock market. As a result, foreign portfolio investment has increased significantly from USD 760 million in 1991 to USD 15 billion in 1993. Foreign direct investment during the same period increased slightly from USD 700 million to USD 880 million. The 1988 Constitution restricts foreign investment in a number of sectors: petroleum, telecommunications, mining, power generation, nuclear activities, fishing, internal transport, health care services, financial institutions, and print and electronic media. In the case of petroleum and telecommunications, state-owned monopolies exist. In other sectors investment is restricted so that the majority of voting capital and the actual decision-making power is held by individuals domiciled and residing in Brazil. The 1988 Constitution gave mining companies four years to conform to the Constitution; all foreign companies were able to restructure their operations and continue operating in Brazil. In the case of financial institutions, foreign companies established in Brazil before October 1988 were grandfathered, but no new entrants are allowed. Foreign ownership of rural property and of businesses adjacent to international borders is prohibited. The Constitutional distinction between national and foreign capital constitutes a denial of national treatment to foreign investors. For instance, the Constitution permits the GOB to offer temporary protection and benefits to companies with national capital. The Constitution also requires preferential treatment for national companies in the procurement of goods and services by the government. Foreign companies can be excluded from certain bids and competitions. Another Constitutional provision gives the State the right to intervene to protect the internal market (establishes the principle of market reserve). Beginning in 1993 a Constitutional Revision Congress considered, among other proposed reforms, eliminating the distinction between foreign and national capital, privatizing all or part of the petroleum and telecommunications monopolies, and permitting foreign investment in mining. However, the period for revision expired May 31, 1994 with very little accomplished. Broad consensus exists on the need for constitutional reform, but significant differences exist regarding the specific reforms needed. All foreign investment must be registered with the Central Bank (see Appendix 2). With certain exceptions the registration is a pro forma matter. The certificate of registration issued by the Central Bank permits remittances of profits and repatriation of invested capital without additional Central Bank authorization. Brazil has a privatization program. Foreigners have been allowed to participate, but are limited to 40 percent of the voting shares for sale. The President of Brazil may, on a case-by-case basis, waive this restriction, and has done so several times. A provision of the April 1994 commercial bank rescheduling will permit foreign banks to invest a part of their rescheduled debt in privatizations. Discriminatory local production and assembly requirements for government procurement exist in the areas of telecommunications, computers (informatics), and digital electronic goods and services. The regulations introduced in 1993 allow consideration of non-price factors and preferences in these areas and stipulate local content requirements for eligibility for fiscal benefits. These provisions, in effect, function like performance requirements, dictating the types of activities required, level of value added, etc. (also see A5). In general, most investment incentives are offered by state and municipal governments although some federal government incentives exist for export production, capital goods production, investment in certain underdeveloped areas or export processing zones (also see A5). Many state and local governments provide tax holidays and/or reductions for greenfield investments and expansions. Usually, the state and local incentives are tied to the investment decision, not to subsequent performance. Brazil has eased import restrictions considerably over the past five years. However, imports of used products, such as machinery, automobiles, clothing, and many consumer goods continue to be severely restricted, if not prohibited. Imports of some used machinery, however, have been authorized under special exemptions. In addition, a series of recent district court decisions have challenged the regulation which bans used car imports. Imports of used machinery and equipment to the Manaus free trade zone are subject to more liberal treatment. - Conversion and transfer policies There are few restrictions on converting or transferring funds associated with an investment. However, the Central Bank has broad administrative discretion in regulating remittances which in the past has created problems for foreign investors. At this time, foreign investors may freely convert Brazilian currency either at the "commercial" or "floating" rates. Foreigners that invest in Brazil must register their investment with the Central Bank Foreign Capital Registration and Supervision office (FIRCE). Investments involving royalties -- including franchises -- and technology must be registered with the National Institute of Industrial Property (INPI) (see A7) as well as with FIRCE. Registration with the Central Bank should be requested within 30 days of the inflow of resources to Brazil. Registration procedures have been simplified during the past two years. FIRCE has worked to eliminate registration delays and its regulations now call for approval within 30 days. If an application is not acted upon, approval is now automatic at the expiration of this period. The Central Bank also registers leasing contracts and offers certain more favorable treatment for longer periods. Unregistered investment can and is also made using the "floating" exchange rate rather than the "commercial" rate, in which case the investor does not have access to the commercial rate for remittances and repatriation of capital and cannot register reinvestment. In the past,the floating rate yielded more local currency when bringing the investment into Brazil (about 10 percent more) and a corresponding lesser amount of foreign currency in the other direction. Since October 1993 the floating rate has averaged about four percent less than the commercial rate. The floating market is not a legal means for profit and capital remittances. Use of the floating market in making investments could thus lead to difficulties. Foreigners investing in Brazil, who have registered their investment with the Central Bank, are able to remit dividends, capital, and royalties, provided that applicable taxes have been paid and certain other conditions met, particularly for royalties and technology, which must be based upon contracts accepted by INPI. This remittance transaction may be carried out at any bank by presenting the certificate of registration and showing that any applicable taxes have been paid. Profit/dividend remittances also require the submission of a balance sheet showing the profit realized. The bank arranging the remittance must check that all requirements have been met and enter the remittance in the Central Bank computer system. The procedure is the same for registering and remitting of principal and interest on loans in the private sector. Remittances of capital gains require specific Central Bank approval. In January 1992, the Central Bank revoked a 1981 instruction which had impeded remittances that stemmed from financial rather than operational profits and which, under certain circumstances, prevented registration of reinvestment stemming from financial profits. Firms are now free to reinvest any excess working capital and to treat financial profits the same as operational profits. Loan Payments. Starting in January 1991, private firms have been allowed to pay external creditors directly. Previously, these payments were made to the Central Bank and retained there to the detriment of creditors. (For foreign loans, bonds, commercial paper, etc., favorable income tax treatment is given on remittance of interest and other charges, provided the funds remain in Brazil for 30 months.) Royalties. There has been a relaxation since 1991 of the restrictions on the remittances of royalty payments for patent and trademark use between subsidiaries established in Brazil and the parent office headquartered overseas and on remittances of franchise contract royalties. A 1992 INPI resolution simplified procedures and, in particular, eliminated a number of requirements (but not all) concerning technology transfer agreements. No royalties or other fees may be transferred between related companies for the use of software. Under the provisions of a 1991 law, royalties for the use of patents and trademarks, and remuneration for technical, scientific, administrative or other assistance paid by the Brazilian subsidiary to an individual or entity domiciled overseas that directly or indirectly controls its voting capital has now become deductible, with some limitations, for purposes of determining taxable profits. Deductions are subject to the requirement that the agreement be signed by the parties, approved by INPI, and registered with the Central Bank. The provision applies to contracts signed subsequent to January 1992. The law also permits remittance payments for trademark or patent licenses by a subsidiary established in Brazil to its controlling company overseas. While the provision governing subsidiaries has been liberalized, branches (as opposed to subsidiaries) of foreign firms do not benefit from the law. Thus, a prohibition remains in effect on making either tax deductions or remittances for payment of royalties for trademark and patent licenses in those cases when the contract is between the branch in Brazil and the parent company headquartered overseas. Transfer of trademark fees is limited to one percent of turnover. In addition, legislation pre-dating the December 1991 changes and applying to both foreign and domestic firms, limits royalty deductions to 5 percent of product sales. The remittance of franchise royalties requires prior action by INPI. Until July 1992, INPI did not recognize franchise contracts, and required separate contracts for trademarks, technical assistance services and technology transfer. In June 1992, INPI issued a regulation which recognizes that all of the above are contained in franchising contracts and, on a case-by-case basis, will approve the contracts for the payment of franchise royalties. Taxes. Profit and dividend remittances are subject to a 15 percent income withholding tax. Repatriations are exempt from income tax. Brazil has no double taxation treaty with the United States, but does have such treaties with a number of other countries. Identification. for all foreign exchange transactions into or out of reais above USD 10,000, the name of the person carrying out the transaction and the purpose must be provided. OPIC Inconvertibility Claims. In the event OPIC must pay an inconvertibility claim, the U.S. Embassy and other USG agencies operating in Brazil have a annual need for approximately USD 18 million in local currency. High inflation has been a part of doing business in Brazil for many years with frequent devaluations. Government attempts to bring down the inflation rate have included the issuance of new currencies (five different currencies have been issued in the last seven years--the fifth, the real, was introduced July 1, 1994). - Expropriation and Compensation There have not been any expropriatory actions in the recent past nor any policy shifts indicating an inclination in that direction. Some claims regarding land expropriations by state agencies many years ago have been judged by courts in U.S. citizens' favor. However, some individuals have not yet been compensated because the states have appealed these decisions. The 1988 Constitution required that, by October 1992, majority ownership of already established foreign mining companies become Brazilian-controlled or divested, unless the company carries on substantial industrial transformation. However, a reinterpretation of the industrial transformation decree released foreign companies from this obligation, if they do not explore or process minerals different from those they explored and processed in October 1988. - Dispute settlement Brazil is not a member of the International Center for the Settlement of Investment Disputes (ICSID - also known as the Washington Convention) nor of the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. In September 1992, the Administration sent to the Congress for approval the text of the Interamerican Convention on International Commercial Arbitration, which Brazil signed in January 1975, as well as the 1979 Interamerican Convention on the Extraterritorial Efficacy of Foreign (Judicial) Decisions and (Arbitral) Awards (Senten as e Laudos). Brazil has signed Bilateral Investment Agreements which permit arbitration by either ICSID or a panel set up under the United Nations Rules for International Commercial Law. Legal experts doubt that such arbitration provisions would apply if the Government of Brazil, or another government entity, was one of the parties to the dispute. Arbitration clauses in contracts are not enforceable as such. Foreign arbitration awards require confirmation by a court of the country in which rendered and the Brazilian Supreme Court. Binding arbitration between foreign investors and state entities is prohibited on the grounds that it infringes the sovereign rights of the state. Brazil has a functional commercial code which governs most aspects of commercial association, except for corporations formed for the provision of professional services, which are governed by the civil code. Bankruptcy laws provide for creditors' rights. An overburdened court system is available for enforcing property rights. Decisions of the Supreme Federal Tribunal are not automatically binding on lower courts, leading to more appeals than would otherwise occur. - Political Violence The U.S. Embassy is not aware of any politically motivated damage to foreign investors' projects or installations. The U.S. Embassy rates the possibility of civil disturbances in Brazil as low. - Performance Requirements/incentives The government has been working for several years with the automobile industry to develop a formula for reducing certain import duties as a reward for exports containing a specific local content percentage. The proposal requires Congressional action, which to date has not been taken. Under it, vehicle manufacturers would be able to import USD 1.00 worth of capital equipment or auto parts with a 95 percent reduction in applicable tariffs for every USD 2.00 worth of exports. Most local content requirements on automobile manufacturing have expired. However, tax exemptions for 90 percent local content in the basic model, "popular cars," do exist. Geographic preferences consist of tax benefits for investment in less developed parts of the country with equal application to foreign and domestic investors; these benefits seem to have had little impact on foreign investment decisions. Some municipalities provide land on favorable terms for industrial development. In firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll. Foreign specialists in fields where Brazilians are unavailable are not counted in calculating the one- third permitted for non-Brazilians. Brazil offers the following export incentives: -- tax and tariff exemptions for equipment and materials imported for the production of goods for export; -- excise and sales tax exemptions on export products; -- excise tax rebates on materials used in the manufacture of export products; -- withholding tax exemption for remittances overseas for marketing and for loan payments; -- financial operation tax exemption for deposit receipts on export products. Brazil offers the following investment incentives: -- accelerated depreciation on new machines and equipment for industrial production; -- income tax deduction for expenses of feeding workers and providing transportation; -- income tax deduction for cultural donations/sponsorships. The Special Agency for Industrial Financing (FINAME) of the National Bank for Economic and Social Development (BNDES) provides financing for purchases by Brazilian firms of Brazilian- made machinery and equipment -- capital goods with a high level of domestic content. - Right to Private Ownership and Establishment Foreign and domestic private entities may establish, own, and dispose of business enterprises. Foreign entities are subject to more restrictions than domestic private entities (See A1 and A2). State- owned petroleum and telecommunications monopolies have Constitutional status. Foreigners generally are limited to no more than 40 percent of voting shares of a company being privatized, with case-by-case waivers possible. Government-owned entities provide virtually all basic data processing for government at all levels, thus effectively closing the largest market for data processing in Brazil to private firms, whether foreign or domestic. - Protection of Property Rights In 1990, the Brazilian government made a commitment to bring Brazil's patent and trademark law into line with world-class standards. In 1991, the government sponsored a bill in Brazil's Congress addressing many of the concerns expressed by foreign governments and companies, as well as by an increasing number of Brazilians who recognize the need for effective protection of intellectual property rights. The Chamber of Deputies passed the Industrial Property Bill in 1993, and it is currently pending action by the Senate. Brazil is a signatory to the GATT Uruguay Round Accords, including the Trade Related Aspects of Intellectual Property (TRIPs) Agreement, signed in April 1994. The Government has indicated its intention to support amendments to bring the provisions of the Industrial Property Bill, which covers patents, trademarks, and trade secrets, into conformity with the TRIPs text. Pending legislation on copyrights, protection for computer software, and protection of lay-out designs of integrated circuits will similarly be brought up to the international TRIPs text standards of protection of intellectual property rights. Brazil is a member of the world intellectual property organization and a signatory of the Berne Convention on artistic property, the Washington Patent Cooperation Treaty, and the Paris Convention on Protection of Intellectual Property. In August 1992, Brazil removed its reservations and accepted fully the Stockholm revision of the Paris Convention. Patents: Brazil currently does not provide either product or process patent protection for pharmaceutical substances, processed foods, metallurgical alloys, chemicals, or biotechnological inventions. The Industrial Property Bill passed in 1993 by the Chamber of Deputies and currently pending before the Senate would recognize all of these categories and extend the term for product patents from 15 to 20 years. The Brazilian Government announced in late 1993 and early 1994 that it would support amendments to the Bill which would bring its provisions into conformity with the TRIPs provisions, including those on compulsory licensing, domestic working requirements and parallel imports. Trade Secrets: Brazil lacks explicit legal protection for trade secrets, although a criminal statute against unfair trade practices can, in theory, be applied to prosecute the disclosure of privileged trade information. The Industrial Property Bill pending in Congress includes civil penalties and injunctive relief for trade secret infringement. Trademarks: All trademarks, as well as licensing and technical assistance agreements (including franchising), must be registered with the INPI. Without such registration, a trademark is subject to cancellation for non-use. The pending Industrial Property Bill includes significant trademark revisions which will improve trademark protection. Until 1992, bogus trademark registrations were relatively common, often resulting in protracted legal actions by the legitimate trademark owners. In August 1992, Brazil announced that it would abide by the Stockholm revision of the Paris Convention in its entirety. Previously, Brazil had adhered only to the so-called nonsubstantive articles of the Convention (Articles 13-30). INPI began enforcing Article 6bis of the Paris Convention in 1991 by eliminating many of the 6,000 bogus registrations of well- known international trademarks and commercial names. Some foreign firms have been successful in court actions against trademark infringement. Copyrights: While Brazil's copyright law generally conforms to world-class standards, the 25-year term of protection for computer software falls considerably short of the Berne Convention standard of the life of the author plus 50 years. Enforcement of copyright laws has been lax. The U.S. private sector estimates that piracy of video cassettes, sound recordings and musical compositions, books and computer software continues at substantial levels. In the last two years, enforcement of laws against video and software piracy has improved, and foreign firms have had some success in using the Brazilian legal system to protect their copyrights. For example, a major U.S. software firm won a landmark decision against software pirates in 1993. The Government of Brazil has also initiated action to reduce the importation of pirated sound recordings and videocassettes. Another government-sponsored bill pending before the Congress since 1991 will improve copyright protection for computer software programs. The bill includes injunctive relief and more stringent criminal and civil penalties for copyright infringement. The Government has committed to supporting amendments to the draft bill to extend the term of protection for computer software to 50 years and to recognize exclusive rental rights. Semiconductor Chip Lay-out Design: A bill introduced in 1992, and still pending before the Brazilian Congress, will protect the lay-out designs of integrated circuits. Amendments to the draft law are expected to bring its provisions into conformity with the TRIPs text. - Regulatory System: Laws and Procedures Although some administrative improvements have been made, the Brazilian legal and procedural system is far from transparent. The Brazilian government has historically exercised considerable control over private business through extensive and frequently changing regulations. The bureaucracy has broad discretionary authority. In its attempts to establish some macroeconomic order, the government has manipulated price indices and imposed price controls. To implement economic changes more rapidly, the government has resorted to decrees rather than secure congressional approval of laws. These are frequently challenged in the courts and a number have been declared unconstitutional. The regulatory instability makes planning difficult. In June 1994 a new antitrust law was passed to prevent "abusive pricing;" it will likely face a legal challenge. Taxes are numerous and burdensome for those who collect them as well as for those who must fill out forms and make payments. An effort to streamline the tax system has begun. Over twenty minor taxes were abolished by December 1991 legislation. A steep supplementary tax on profit and dividend remittances was eliminated; there is now one tax of 15 percent. With the revocation of the remittance surtax for remittances in excess of 12 percent of registered capital, the size of the remittance base, i.e., the value the Central Bank registers, is much less important than previously. An 8 percent tax on profits of both foreign and domestic firms expired December 31, 1993. During 1994, a 0.25 percent financial transactions tax has been charged on every debit from bank accounts. - Capital Markets and Portfolio Investment Brazil opened up its market to foreign portfolio investment in 1991. The Brazilian financial sector is large (approximately 15 percent of GDP) and sophisticated in operating in a high inflation environment (2500 percent in 1993 and approaching 11,000 percent annually by the end of June 1994). High real interest rates (in excess of 30 percent a year) and a reluctance of banks to lend for more than six months mean that few businesses, either foreign or domestic, borrow locally. Nor do they raise money on the local stock exchanges. Instead companies doing business in Brazil seek to borrow from abroad to take advantage of lower interest rates. Banks in Brazil derive little income from traditional banking operations; most of their profits come from gains made trading government debt paper and interbank overnight loans. An economic stabilization program has been announced by the government that intends to eliminate inflation by balancing the government budget, introducing a new currency, and implementing other structural reforms. Should this program achieve its ends, banks will lose a large portion of their "float" profits and will probably shift to more traditional banking operations. Many private banks say they are prepared, but most analysts expect state-owned banks to suffer because of high personnel costs and large bad-debt portfolios. -------------------------------------------------------------- BANKING SYSTEM Total Assets in USD Billions 12/92 12/93 (numbers in group) Total Banks (236) 201.5 238.2 Largest Banks (21) 166.0 157.2 Foreign Banks (68) 32.7 38.4 ---------------------------------------------------------------- The federally-owned Banco do Brazil is the largest bank in Brazil in terms of assets (USD 64.9 billion) and deposits (USD 11.1 billion). In contrast, the second-largest bank, privately-owned Bradesco, has assets of USD 16.9 billion and deposits of USD 7.4 billion. Few corporations raise capital through the Brazilian stock exchanges. In 1993 USD 841 million was raised by 24 new issues in the primary market. USD 39.6 billion turned over on the secondary market in 1993. Trading on Brazilian exchanges is highly concentrated in a very few stocks. While 829 companies are listed on Brazilian exchanges, the telecommunications parastatal, Telebras, accounts for over 50 percent and the electric utility parastatal, Eletrobras, accounts for almost 20 percent of the volume traded on the exchanges. The Brazilian Securities Exchange Commission (CVM) directly regulates the stock exchanges, corretoras, distribuidoras, pension funds, mutual funds, and leasing companies. The CVM follows the policies set by the National Monetary Council and the Central Bank. Foreigners can only participate in the Brazilian securities market through a management company authorized by the CVM. The CVM is administered by a president and four directors, appointed by the President and subordinate to the Finance Minister. Legislation establishing the CVM (enacted in 1976) empowers it to supervise the activities and services of the securities market and impose fines to punish infractions. CVM authorization is required before securities exchanges can start operations. The CVM has acted to open the capital market both internally and for the foreign institutional investor. New types of securities have been authorized. More recently steps have been taken to hire more staff to enable the CVM to pursue its regulatory responsibilities more actively. At present, up to two-thirds of a corporation's capital may be preferred (nonvoting) shares, so that it is possible to achieve majority control of voting shares, in some cases, by holding only 17 percent of total capital. Accords have been signed with the Argentine and Uruguayan stock exchanges. The Government of Brazil admitted foreign portfolio investment by institutions via Resolution 1832 of May 31, 1991. Foreign portfolio investors, institutions and funds, must be registered with the CVM. Previously, institutional investors could not invest directly, but only via an investment fund established abroad. An individual must invest a minimum of USD 5 million. No longer must funds remain in the country for a minimum period before being repatriated. A dividend remittance tax is 15 percent. Foreign investors' response was favorable: PORTFOLIO INVESTMENT (USD MILLIONS) Year INFLOW OUTFLOW NET ---- ------ ------- --- 1989 149 206 - 57 1990 171 67 104 1991 760 189 571 1992 3,864 2,160 1,704 1993 14,971 8,377 6,594 1994 (jan-mar) 5,916 3,326 2,590 In mid-1991, foreign investors were permitted to invest in Brazil via American and international depository receipts (ADR's and IDR's), i.e., securities issued abroad based upon Brazilian shares deposited with a financial fiduciary institution. The ADR are gaining in use. Permission for firms in Brazil to place commercial paper in international markets was granted in mid-1990 and has been much used as a cheaper source of financing than at the high real rates and short-terms available in Brazil. Rules allowing swaps and hedges were issued in 1992. Resolution 1935 of June 30, 1992, authorizes foreign institutional investors to trade on the futures and commodities market (BMF) futures and options contracts, based on stock indices, interest rates, and exchange rates. Leasing operations are extensively used and export financing by other governments is sometimes available for goods being imported into Brazil. BNDES, the government national development bank, is the primary Brazilian source of longer-term credit. BNDES has traditionally limited its financing to Brazilian firms, but may consider loans to foreign firms, particularly for modernization and environmental purposes, provided BNDES' own source for such funds is foreign, e.g., the World Bank or Inter-American Development Bank or a bilateral official financing program. The first such loan to a multinational company was approved in June 1992. FINAME (Special Agency for Industrial Financing) provides foreign and domestic companies operating in Brazil financing for the manufacturing and marketing of capital goods. In 1993 the program received USD 1.7 billion from BNDES. FINAMEX (Export Financing) is a part of FINAME, which finances capital good exports for both foreign and domestic companies. An export credit program for capital goods, known as PROEX, was passed in 1991 to replace the FINEX program. PROEX receives funds from the National Treasury to offer assistance in the area of: interest rate equalization, capital goods exports, and service exports. Wholly-owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. Changes in indices used to correct for inflation have, at times, made normal accounting practices more difficult and given rise to legal challenges. Reinsurance is a government monopoly. Parastatal companies are required to purchase insurance only from Brazilian insurers. Brazilian law recognizes mergers, in which one company loses its separate identity by being merged into another, and consolidations, in which the pre-existing companies are extinguished and a new entity emerges. The procedures for both are essentially the same. Sales of Brazilian companies usually result from private negotiations, rather than stock exchange activities. - Bilateral Investment Agreements Brazil has signed Bilateral Investment Agreements (BITs) with five countries: Switzerland, Portugal, Mexico, Chile and the Republic of Korea. Brazil has just announced plans to sign an investment agreement with the United Kingdom at the end of July 1994. In addition, the Mercosul agreement between Brazil, Argentina, Uruguay and Paraguay includes investment provisions. Brazil has ongoing BIT negotiations with Italy, China and Germany. - OPIC and Other Investment Insurance Programs of the Overseas Private Investment Corporation (OPIC) are fully available, with activity having picked up in the past 3-to-4 years. The size of OPIC's exposure in Brazil may occasionally limit its capacity for new coverage; in particular, OPIC's inconvertibility insurance program in Brazil is its largest in any country. Brazil became a member of the Multilateral Investment Guarantee Agency in 1992. - Labor Regional disparities are profound in terms of the availability of skilled and semi-skilled workers. Regional disparities are also apparent in regard to illiteracy, which, according to 1990 Brazilian Institute of Geography and Statistics (IBGE) statistics, stands at 23.3 percent of the population -- with 14.7 percent illiteracy in the southeast (which includes Rio and Sao Paulo) and 42.6 percent in the northeast (including Recife and Salvador). Functional illiteracy is higher than the noted rates. Strikes are down substantially in the private sector since 1990, due to business salary adjustment policies and to the recession. Public sector strikes continue at a higher level, many motivated by the lack of inflation adjustments in salary common in the private sector. Upward pressure on wages of skilled labor provides an incentive for automation, even while government economic policies and, more recently, recession and high unemployment, have depressed real wages of much of the labor force. Labor unions, especially in the more skilled areas such as metalworkers and bank employees, tend to be well-organized and aggressive in defending wages and working conditions. Until recently, labor relations were dominated by a conflict approach. Both management and labor would stake out extreme positions and defend them as long as possible. The ultimate decision on salaries, job tenure, and other areas would be imposed by the labor courts, rather than through negotiated compromises between labor and management. A more negotiation-oriented approach has been advocated by the newly elected head of the Sole Workers Central (CUT), Vicente Paulo da Silva. The Auto Sector Accord of 1992 adopted this approach; the negotiated wage, price and tax concessions have helped the industry increase production. The 51-year-old Labor Code (CLT) has been the target of three major reform attempts over the past four years. However, the opponents of change remain strong, and so no concrete action has been taken. Elements of the Code most frequently criticized include: a) mandatory and extensive benefits; b) a mandatory tax on employers and workers to support government-sponsored unions; c) restrictions on union organization (some of which have been eased in the past several years); and, d) the labor courts system. The most recent efforts have been directed at the repeal of a major part of the CLT to permit collective bargaining to resolve most labor-management issues and to eliminate restrictions on union organization. The CLT restricts unions to no more than one union per defined "category" per geographic area -- with what constitutes a "category" being defined by the government. Government efforts to control salary levels in private business have subsided. In reaction to continuing high inflation, most businesses adjust salaries monthly by a percentage of an agreed inflation index, with a full inflation catchup once yearly. As part of a package of measures to support its economic stabilization plan, the government shifted wages in March 1994 to the same index used to measure prices increases. With the introduction of a new currency on July 1, 1994, the government hopes that inflation will drop. Wages, theoretically, will now be adjusted only during contractual renegotiations. - Foreign Trade Zones/Free Ports As of May 1994, four free trade zones exist -- Manaus, Macapa/Santana, Tabatinga, Guajari (in the northern Amazon region) -- and three others are authorized -- Bofim, Pacaraima, Brasileia (in the western Amazon region). With the exception of Manaus, the Regional Development Secretariat of the Ministry of Regional Integration administers the zones. The Manaus Free Trade Zone is the most extensively developed and has a constitutional mandate through the year 2013. The Manaus free trade zone was hard hit by the erosion of its special status due to the general lowering of tariff and non-tariff barriers. In July 1992, the government announced a series of measures to help the Manaus Free Trade Zone. Each industry must perform certain basic assembly steps in the zone in order to qualify for fiscal incentives. To protect industries, such as consumer electronics, which are heavily concentrated in the zone, the new measures raise by ten percentage points the federal tax on manufactures (IPI) on competing products which are either imported from abroad or produced in Brazil outside the zone. The initial list includes stereos, televisions, and VCRs, none of which are produced in Brazil outside the zone. Computers and peripherals are not on the list. Both foreign and domestic firms can operate in Manaus. The pre-existing fiscal incentives for Manaus include exemption from the IPI and from tariffs on imported components, and reduced tariffs on products shipped from Manaus to the rest of Brazil; reduced state tax (ICMS) on products imported from or exported to the rest of Brazil; up to ten years' exemption from federal income tax; exemption from import license fees. The new regulations add that computer firms can benefit from both the fiscal benefits and the change in local content requirements. With special government permission, computer firms, although required to perform much basic assembly in the zone, may be permitted to import circuit boards which use only surface mounted devices, a provision which worries producers of computer components in the rest of Brazil. Responsibility for determining eligibility for the incentives and vetoing applications from firms interested in setting up operations in Manaus rests with "SUFRAMA" ("Superintendencia de Desenvolvimento da Zona Franca de Manaus"), together with the Amazonia Regional Development Administration ("Superintendencia de Desenvolvimento da Amazonia") and the Federal Regional Development Secretariat. In addition to the free trade zones, 14 export processing zones have been authorized. They are administered by the Ministry of Industry, Commerce and Tourism. To date, only four have begun initial infrastructure construction; the remainder are still in the planning stages. - Capital Outflow Policy Brazilian investment abroad plunged due to the worldwide recession in 1992, but has subsequently recovered. YEAR NET OUTFLOW ---- (USD MILLIONS) 1988 175.5 1989 552.9 1990 731.2 1991 1,014.9 1992 146.1 1993 (jan-jun) 718.0 Use of the "floating" exchange rate to purchase foreign exchange was liberalized in 1992, but many restrictions still apply. Under current regulations, individuals and firms are allowed to purchase stock on exchanges in other Mercosul countries (Uruguay, Argentina, and Paraguay) subject to various controls and limitations. Firms may send up to one million dollars per year abroad to related companies to pay for offices, service centers, and representatives without previous Central Bank approval (but the transaction must be communicated to the Central Bank). Firms may also send more than one million dollars abroad provided that the bank carrying out the transaction consults the Central Bank regional office 30 days in advance and the Central Bank has no objection. Upon closing business activities abroad, a Brazilian firm is required to repatriate capital and any receipts. - Major Foreign Investors ----------------------------------------------------------- Major U.S. Investors in Brazil as of 4/30/93 (USD Millions) ----------------------------------------------------------- COMPANY TOTAL INVESTMENTS ------- ----------------- Ford Electronics & Refrig. Corp. 577.5 Chase Manhattan Bank N.A. 487.6 Alcoa Brazil Holdings Co. 445.0 General Motors Corp. 434.2 IBM World Trade Corp. 390.9 Caterpillar Inc. 273.7 Goodyear Tire & Rubber Co. 235.2 Westinghouse Electric Corp. 189.4 Champion Papers Inc. 183.6 Dow Chemical Co. 164.7 Johnson & Johnson 159.1 Monsanto Int'l Holding Inc. 146.8 Citibank N.A. 143.9 Atlantic Richfield Co. 139.7 Texaco Overseas Holdings Inc. 138.3 Eastman Kodak Co. 135.9 EBHP/Utah Int'l Inc. 132.8 Manufacturers Hanover Trust Co. 131.1 Philip Morris Marketing S.A. 130.2 CPC Int'l Inc. 128.3 Bank of New York 127.1 Whirlpool Corp. 125.4 Exxon Rio Holding Inc. 123.1 Chase Manhattan Oversear Banking Corp. 117.5 The Brazil Fund Inc. 109.2 International Capital Corp. 105.4 Jacuzzi Inc. 104.5 Source: Central Bank of Brazil