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Brazil Continuing to Grow and Expand its Middle Class

Foreign Affairs Live: Brazil Outlook with Michel Temer

Speaker: Michel Temer, Vice President, Federative Republic of Brazil
Presider: Gideon Rose, Peter G. Peterson Chair and Editor, Foreign Affairs
April 4, 2014
Council on Foreign Relations

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ROSE: Ladies and gentlemen, welcome to Foreign Affairs Live, Brazil Outlook. We have the extraordinary opportunity today to hear from Brazil's Vice President, Michel Temer, who is in charge of helping to run one of the world's most dynamic countries, and economies and is responsible for managing relations with a number of crucial bilateral partners, and helping to, essentially, oversee Brazil's continuing rise onto the world stage, and in its economic, social and political development.

And, we are, as all people have been watching the Brazilian rise with interest and admiration and respect, and are delighted to be able to hear about the country and its progress and its challenges from, as it were, the guys in charge, and without further ado, we're going to hear from president -- Vice President Temer.

TEMER (THROUGH TRANSLATOR): First of all, I would like to compliment -- congratulate everyone, particularly Mr. Rose, and Dr. Martin Guarnero (ph), who have invited us for this wonderful opportunity, where I will be speaking in the name of Brazil for Americans and Brazilians who are here and who have a -- who are interested in Brazil.

I also thought that the topic that they have selected for me is very -- so I'm going to talk about the political and institutional situation of Brazil right now. To summarize what I'm going to say, first of all, I'm going to give a broad overview of Brazil since the first republic to tell that throughout the years, Brazil had never had political and institutional instability. But nowadays, we -- we live under the constitution of October, 1958.

When the Brazilian republic was proclaimed, and I'll be very brief about this, our first constitution was in 1891. Rui Barbosa (ph) participated in -- in that constitution, and he admired the American system. So, the Brazilian constitution of 1891 was very democratic because Barbosa admired the American system, but despite that -- that system, we lived until 1930 from crisis to crisis. And the most important reason was that the constitution wasn't being followed.

So, in 1930, a new movement happened, and it was very authoritary and two constitutions were created.

The one from 1934, was very short, until 1937, and in 1937, the constitution was changed and was very authoritary, and it's lawful.

From 1930 to 1945, we had crisis after crisis. And, also, the separation of powers wasn't being obeyed. The National Congress was closed, and the president of the republic governed through the -- law decrees. We always believed that the absolutist system is something from the past, but throughout the history of Brazil, we have had so many times in which we had this absolutistic state.

Until 1945, when the centralized government falls, and a new constitution it starts in 1946. This constitution was very democratic, but even though it was democratic, from 1946 to 1964, we had again one crisis after the other. Economical, institutional, all types of crisis. Mainly because the constitution was not being observed.

There was a huge gap between the formal constitution, which is the written constitution and the actual constitution, what was really happening in the state. So, after crisis after crisis, in 1964, on April 1st, we had, again, another very centralized system with the Institutional Act created and produced by the revolutionary forces that put in force, again, the constitution of 1946, with the modifications that the Institutional Act brought.

So, the constitution continued in force by means of Revolutionary Act, which is, so I'm guiding you through a period of time that goes from the constitution of 1947, until we come to a very authoritarian constitution that allowed, apparently it allowed the power to come from the -- the people, but in reality this was not happening.

So, in 1968, we had Institutional Act Number Five, that gave absolute powers, total powers to the president of the republic. So, all the powers were concentrated in the federal union, in the executive power, in the -- in the person of the president of the republic. So, to exemplify what I'm saying, the president could stop people from having the mandates -- electoral mandates and this was -- was done time over time. So, there was a huge gap between the written constitution and what was happening on daily life.

So, the hugest number of crisis that we had, political crisis, was from '60 -- from '68 to '85, and there was terrible persecution against the people who challenged the government. So, after this brief summary of the history, we -- we come to 1987, when we had a national constituent assembly that produced one of the most democratic constitutions that the world knows. The constitution of October 5, 1988, is a mix of the liberal state principles together with the socialist state.

And now, I'm going to talk about the political and institutional scenario that starts in April 5, 1988. The first is stage of what we call liberal democracy. The principles of liberalism have been intensively applied in our country. So, following the constitutional that was -- system -- that was approved. So, we came out of the authoritarian system and got to a very liberal state.

The Article Number Five, of the Brazilian constitution, has more than 70 paragraphs that talk about individual liberties. Or if you would prefer the political expression, human rights. And, besides this, it also says that all the treaties that talk about human rights should be obliged in Brazil.

So, we have been enjoying this freedom of expression, freedom of press, freedom of association, a wide range of freedoms and there is a very strong division between the functions of the state which obeys the principle of the -- the independence of the powers. But, we also pay attention to the harmony between -- between -- among the powers, which is not the case, of course, of the United States, that doesn't have any problems with this, but other countries do.

So, people put an emphasis on the independence among the powers, but they forget the harmony among the powers, because there are three powers in the state. But the power from the state is only one, it's the power that emanates from the people. So, one of the functions of the -- the -- the state is to create laws. Another is to judge and create laws. So, I'm not going to explain further the principle of the separation of powers, but I would like to say that we have harmony and independence among the powers in Brazil. And in the sequence I'm going to explain this.

Since we spent 10, 15 years putting into force the liberal principles, at a certain point Brazil is still a poor country, with lots of people under poverty. So, people started thinking about how to put bread on the table, how we can be fed, how -- how we can prosper, how our children can prosper, how my family can be inserted in the Brazilian society. And, then, we started applying the principles of social democracy based on the constitution. So, I would like to mention that this is not only an action of the government, but also a way of putting into force the constitution.

So, the social principles are established in the Brazilian constitution. This has generated actions of the government, directed towards the least favorite classes.

In the past 12 years, around 35 million people have left the -- the extreme poverty. See, this would -- would be people who used to live with $30 to $40 a month, and now they belongs to what is called the C Class, which is a lower middle class, but people who are starting to be able to -- to buy TVs, to eat better, people who have been able to buy their first car or go abroad for the first time, also have their children attend the schools. So, 35 million people in the C Class, which is an extraordinary social ascension.

So, these people have started to consume and now the Brazilian industry and international companies have been able to produce more in order to meet the needs of the C Class. So, before we had a very strict concept that used to define what a national company is, and these used to give them financial and benefits, opportunities to get loans from the government, but the government in the -- after 1988, decided to modify the concept of a company nationally owned, in order to benefit companies that had investments from abroad, but were operating in Brazil. So, this opened up the Brazilian market for foreign companies.

So, we had an increase in investment, not only in companies that were in Brazil already, but new companies that decided to invest in Brazil. So, I'm presenting a combination of the social and the economical context, based on the constitution. So, the right to property in the Brazilian constitution is an individual right.

In our constitution, we have a chapter about entrepreneurship, private entrepreneurship, which is praised in the Brazilian constitution, based on the fact that Brazil understands that very little can be done without the participation of entrepreneurship, Brazilian and foreign. This has been the top theme of the governments that have come after 1988.

It's interesting to go back to the history of the democratic and social principles. Our constitution is very young. It has 25 -- it is 25 years old. So, now we have, I've spoken about the liberal democracy, the social democracy, and now we are talking about the efficiency democracy, because all these people who have ascended socially, and now are at the lower middle class level, and before they couldn't ask for anything, they couldn't even dream, now they have initiated a process of demands.

And I would like to say also that there is -- there has been ascension from the upper middle class to a higher level. So, there is a huge percentage of Brazilians who have moved up from the B Class to the A Class, and from the C Class to the B Class, and this is very important for the people who want to invest in Brazil.

So, the third part of this democracy, I'm calling it the efficiency democracy. So, now we have lots of people who have been incorporated to the middle class, which is the class that is the most mobilized in any society. So, this class has been asking for more efficiency in the social services, and from the government.

"In the past twelve years, around thirty-five million people have left the extreme poverty. See, this would be people who used to live with $30 to $40 a month, and now they belong to what is called the C Class, which is a lower middle class, but people who are starting to be able to buy TVs, to eat better, people who have been able to buy their first car, or go abroad for the first time, also have their children attend the schools."

So, I'm from Sao Paulo state, and I have noticed that many more people have cars now, and this is very, very good for the automotive industry. Brazil is the fourth country that sells more cars in the world, but the problem is the person that just bought a car takes three hours to -- to arrive at his or her job. And, then these people go to the airport and see that the service are not good.

They enter on the subway and they are like sardines in a can. So, these people demand better services. And this has created a movement on the streets that started last year, and the president of Brazil, Dilma and I, we -- we didn't get scared. We understand that this is result of everything that we have done and is a consequence of this social ascension of the people.

And, the -- the only reason why this movement are not so well regarded at the moment is because political parties entered and joined this movement, and -- and is starting with violence and demoralized a movement that was democratic and supported by the government, because it's based on the liberal principles that the Brazilian constitution follows.

So, this has made that the powers, particularly President Dilma called all the governors of the Brazilian states and started to talk more about commuting, education, investments in health because we are convinced that this protests are a result of what we have done in the past, and now I'm saying here that we have to be efficient in our policies, efficient in the private and public policies.

And, it's interesting that we have been getting results. I have been participating in several inaugurations of international companies that are investing millions of reals in Brazil. And, when I go to this events, I always say that we have to understand that the entrepreneurs want to have a return to their investment.

They -- nobody invests to lose money. Everybody invests to earn money, to earn a profit. And because of the past two months, when some say that Brazil has lost the confidence of the international investors, this is not true. Only this past month, I have been to three inaugurations of international companies that are investing in Brazil, and they are investing now, not to make money today, but in the future, because they believe in the Brazilian economy and government.

So, when I talk about appliances I can say that lots of people in Brazil will continue to consume these goods, and people will continue to invest.

To conclude, I'd like to say that we went through these stages of the Brazilian constitution without any institutional trauma. So, the crisis used to create new Brazilian government, which used to be very bad for investors, because they had no assurance that contracts would be observed and they were unaware of the changes in the policies, but nowadays, after 1988, we had the impeachment, which has been in the constitution since 1891, but we did have an impeachment after 1988.

"So, these people demand better services. And this has created a movement on the streets that started last year, and the president of Brazil, Dilma, and I, we didn't get scared. We understand that this is result of everything that we have done and is a consequence of this social ascension of the people."

The VP took office and then we had an election that elected a labor worker, and now we have a woman that governs Brazil. So, nowadays, nobody thinks about an institutional crisis in Brazil. And, sometimes, the -- the word crisis is used not in a discriminatory way.

So, we can have sometimes political crisis or economical problems, but not institutional crisis. An institutional crisis is the fall of the institutions which we had several times in Brazil.

But, now we have a stability and confidence about what's going to happen in the future. And, now, I'm saying this because this is what interests the people who invest because the right that arises from the constitution is created to set the rules of the game. So, if I set up a company, I know the consequences, I know the rules. So, when the constitutional rules are obeyed, the tendency is for institutional stability and which is what we have in Brazil.

I -- I preach this on a generic basis, but this also goes to the private and individual states, because since we have institutional stability, we can invest in Brazil without any problems. I have data to prove there from 2003 to 2014 we have opened 220,000 new jobs. So, if we have opened these jobs, it's because the companies are prospering.

In terms of the reduction of poverty, in 1995 the percent of poverty in Brazil was -- was 57 percent. Nowadays the percentage is 16 percent. But, we want to be at 8 percent at the end of this government, and maybe, hopefully, in the next government, we will have a country that has all the people at least in middle class.

When -- when I used to teach at the law school in Sao Paulo, and I talked about the -- the movement in 1964, I used to think, wow, these people weren't even born at that time. In 2003, we had 30 million people -- 30 million young people working.

Nowadays, we have 60 million young people and I'm saying this to show that investors are willing to invest in Brazil regardless of the international crisis. We've seen that the -- the Eurozone had a high percentage of unemployment. Here in the U.S. it was 6.7 percent. In Brazil it was four percent. So, regardless of the international crisis, we were able to continue to progress in Brazil.

And our production increased, consumption has increased. Nowadays, we have 108 million people in the C Class, from 68 million. Today we have 48 million in the D and E Class, which is lower levels than we had in the past. We -- we have the seventh economy in the world. We are close to ...

I would like to mention a program that we have in Brazil, which is My House, My Life. It shows how the construction field is open in Brazil. So, we have delivered one million and 500 new houses for the people who have ascended socially. So, we have a big, open field for construction.

My final words, we really want to have a lot of foreign investment in Brazil, particularly the American investment. Because, American investment has a tradition in Brazil. We still have an infrastructure that is not efficient. We have been offering concessions to show that this benefit in infrastructure will be made not only by Brazilian companies, but also by international companies.

So when we finally have all this infrastructure in place, the country will be growing at such a pace that will make -- make viable many more investments in Brazil. We will have nine highways being built. The Brazilian harbors in Brazil nowadays, are public, belong to the government. But the harbors, ports, are -- are being privatized now.

So -- so we're widening the opportunities for private enterprise. We -- we are giving concessions in 15 states. We are authorizing now private harbors. In the case of the -- of commuting in the big cities, we have investments in solar (ph) power subway systems, and in our other cities we have railroads. We are also investing in 10 railroads. The investments will be made during a period of five til -- five to six years.

So, the infrastructure organization is essential to allow foreign investment to -- to grow in Brazil. We are investing in airports in Sao Paulo, Brasilia, Rio and Belo Horizonte. And this airports have been given to private entrepreneurs. BRL8 billion are being invested in airports. In terms of oil, Brazil has found oil beneath the salt layer, and Brazil will be almost self-sufficient in terms of oil in the near future.

So, I'm presenting the figures to prove that we are not only in the theory, but we are also doing this initiative in a practical way. So, today, I read in the Brazilian newspapers that an American institute says that Brazil is number one, particularly among the BRICs. It's the first in terms of social progress.

They say that Brazil will keep the same ranking this year and next year. So, I would like to thank you for the opportunity to give you this brief history. I am an attorney, and I remember that when I -- I believed in the client's cause, I was very enthusiastic in my defense, so I hope that here I have -- I have played the role of someone who believes in my country, and I have spoken with the enthusiasm of somebody who believes in the (inaudible).

(APPLAUSE).

ROSE: Thank you very much, Mr. Vice President, for that -- for that very thorough review of the situation in Brazil. So many question, so little time, especially because we'd love to get as many as possible of our guests and participants to -- to take part. But let me just ask a couple of questions.

You talked about international investors. It's possible that we have a few of them here in the room today, and one of the questions that -- that community has been grappling with is the question of why Brazil has had such a hard time sustaining high growth rates. So, I'd love to get your thought on that, and on what it will take to get Brazilian growth back up to a strong level.

TEMER (THROUGH TRANSLATOR): I think Brazil had suffered the effects of the international crisis. In 2009, Brazil, in the same way as other countries, has had an internal product negative. But our index last year was 2.9. We lost to China -- China, maybe Indonesia, Saudi Arabia, but I believe that compared to European countries, and perhaps even the U.S., we are in a good position.

We cannot pretend that Brazil is apart from the rest of the world. What happens in other countries impacts Brazil. But, I'd like to say that throughout, (inaudible) of the time, Brazil has given incentives to Brazilian companies, and we decreased taxes for, because there was -- there were lots of complaints about labor costs for the companies.

So we are trying to do as much as we can to get out of the difficulties, but I'd like to say that our difficulties are the same as the difficulties as other countries have. But we are developing along, and we are going to develop even more.

ROSE: It may be self-serving, but Washington tends to see itself as acting on behalf not just of its own interests, but that of a broader global, liberal order. And, so, Washington sees itself not so much an American foreign policy, not so much as a hegemonic action, but as promoting and sponsoring a global order that allows other countries to rise up within it.

Brazil has risen, and has grown, and has flexed its muscles, and some in Washington wonder whether it wants to participate more in that U.S. sponsored order, or somehow overturn it, or challenge it. And, I'm curious how you see Brazil's ambitions on the global stage?

TEMER (THROUGH TRANSLATOR): Brazil has participated in this phenomenon that is a global phenomenon. Brazil doesn't look only at itself. Brazil looks at other countries.

Brazil belongs to several international organizations, one of them is the BRICs, which is not established by law, but is an association of countries that work together, not only for their own interests but to reach global development.

So, in Brazil, we have a constitutional act that says that Brazil will do as much as possible to establish a Latin American organization. And, Brazil participates in several organizations in Latin America in order to increase the opportunities in those countries, and -- and among the BRICs, Brazil is one that has the most progress and development. And, Brazilians' participation in this organizations and Latin America is to help the other countries.

And our relationship with the U.S. is historic and traditional, and to prove this you can see all the companies that are established in Brazil. It's difficult for a Brazilian company to establish in Brazil -- in the U.S., but we have a very good relationship with Washington, and we intend to continue with this.

The United States, in the beginning of the Brazilian history, towards England, but nowadays, it's U.S. And I have taken part in two events in London with Mr. Cameron, the prime minister, about safety itching (ph) issues, and Brazil co-presided the events in London because we have this history of trying to progress in the social level.

ROSE: Excellent. At this point, I want invite participants to join our conversation. So a reminder that this meeting is on the record. Let's wait for the microphones, speak into it, and we'll get a couple of concise questions in, I think. So, yes, over there. And then we'll also bundle it with one over here, too.

QUESTION: Bom dia, Senor. My name is Tanisha Tingle-Smith, I'm an independent Brazil watcher, and a member of the CFR Brazil Task Force. Brazil remains a country of interesting paradoxes. At the same time this week Brazil was notably lauding the strides the country has made in the transition to democratization, since the dawn of the military regime 50 years ago.

There were also rather stark reports about the increasing militarization of many communities in Rio under the aegis of the pacification program. To what extent is the government engaging civil society groups, and other interested parties to ensure the human rights and the protection of social welfare in Brazil's most vulnerable cities? Thank you. Obrigado.

ROSE: And let's also get one here.

TEMER (THROUGH TRANSLATOR): Well, it's very good that you remember this aspect. The militarization in the states of Rio de Janeiro is not an intervention from the armed forces in the institutional level. It's help that the armed forces have been providing to the police in Rio, because safety -- the safety issue and drug -- drug traffic are very important problem in Rio.

So, in Rio the drug traffickers were making the life of everyone in Rio very difficult, and also the rest of the country. So, in -- in Rio we have created the UPP, which is units of the police that are aimed at pacifying the communities and these are police that is trained not to be violent, but to integrate the people from the community in the Brazilian society. However, the violence of the drug traffic sometimes is so strong that, from time to time, the armed forces have to intervene.

So, we, I'm going to give you an example. The armed forces will participate in the World Cup in Rio, in order to ensure the safety of the people, and I would like to invite everyone to go the World Cup. So, the local -- the local police forces, together with the armed forces, are joined to help make people safe in Brazil.

So, these interventions have been sporadic. The armed forces in Brazil behave in a very discreet way, sometimes too discreet in order not to interfere with the state. And I would like to use the opportunity to talk about religious freedom in Brazil. To say that we are the champions in religious freedom in the world. We are number one, and I wrote an article about this and I got millions of people talking to me about this in the social networks.

ROSE: Thank you. So, let's go here for the next question.

QUESTION: C.G. Nakahodon, (ph) (IN A FOREIGN LANGUAGE)

TEMER (THROUGH TRANSLATOR): And to review as policies based on its ranking. First of all, the lower ranking did -- was not given for the investments, and today Moods has told us that it's not going to give us a lower grade.

And if you ask me if Brazil is concerned about this, of course, the Brazilian government knows and has confidence in what it's doing, but of course, it serves as an alert in the same way as the movement in June made us become alert and guided us to make more investments in -- in infrastructure. So, I would like to say again, that the lowest ranking did not reduce the investment in Brazil. But, we take it as an alert. The lower grade was minimum.

ROSE: It's always the tradition of the Council that we end on time, but since we started a little bit late, I'll let it run for another five minutes, so we'll get a couple more questions in. Yes. Over here.

QUESTION: Thank you. Good morning, Vice President. Thank you for exceptional remarks. My name is Earl Carr (ph). I had a question, many economists as well as interest groups, in particular the National Confederation of Industry, ICI, argue that the government is not doing enough to control the inflation rate in Brazil.

The Brazilian Central Bank last week announced that they were increasing the inflation forecast from 5.6 percent to 6.1 percent. In your opinion, is the Brazilian government doing enough to control inflation? Particularly as you look at how to help the social middle class increase?

TEMER (THROUGH TRANSLATOR): (inaudible). Yes, the government is doing the possible and impossible. Our goal is 6.5 percent, and this goal hasn't been changed.

Last year, we had -- we were under the impression, particularly me, last year around June, Oh, my God, in December we will have huge inflation. But, last year, we sticked to our goal, and this year, the same thing is happening, but I'm going to assure you we are going to continue with the same goal. Six, 6.4 percent, is our goal, but the average in the past few years has been 5.4.

So, we had to increase the interest rate in order to control inflation. Inflation is like tomatoes, like last year tomatoes increased their price a lot, so people said, oh, inflation is going to rise.

So, this year, people are having the same idea because tomatoes increased their price. But I can assure you that this is not going to happen, and the government is working to make sure that this doesn't happen. So, we didn't like to increase the interest rate, but we did increase it in order to keep inflation under control.

"[T]he president was supposed to come to the U.S. last year, but she couldn't come and she said she postponed, because of the spy scandal. But this topic has been treated through the diplomatic channels, and I think we are going to have a meeting very soon with President Dilma and President Obama."

ROSE: Last question over here.

TEMER (THROUGH TRANSLATOR): Hello, and I'm Julia Swieg, with the Council on Foreign Relations. Mr. Vice President, thank you for being here with us.

Last year, President Dilma and President Obama used the word postponement to describe their decision, or the decision, for the President of Brazil not to come to Washington for the state visit last October. Can you talk a little bit about how the bilateral relationship might go in the future?

Independently of whether the president is able to be re-elected, could you speak a little bit about, and potentially return to Washington, for the state visit. What do you foresee the relationship looking like over the next two to five years, in terms of the partnerships and the strategic dialogues, and those wonderful words that have been used to describe its trajectory over the last ten years? Thank you.

TEMER (THROUGH TRANSLATOR): So, you are referring to an episode that happened last year, when the president was supposed to come to the U.S., last year, but she couldn't come and she said she postponed, because of the – the spy scandal. But this topic has been treated through the diplomatic channels, and I think we are going to have a meeting very soon with President Dilma and President Obama.

And they have been meeting each other in several international events, and they have been talking about the -- the Snowden scandal, but this is going to be overcome very soon. Because the relationships between Brazil, and Brazil cannot afford a rupture. We will have a deeper partnership with the U.S. and my presence here is also an -- an indication that the Brazilian government is very comfortable with the relationship between Brazil and the U.S.

ROSE: I think that's a wonderful note on which to end. Mr. Vice President, thank you very, very much. We're with you in spirit, if not in presence in June, and for years and decades to come, and welcome an ongoing relationship.

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