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Brazil (country profile)

BRAZIL (Federative Republic of Brazil) Valeriano Mendes Ferreira Costa 1. History and Development of Federalism With a total area of over 8,500,000 km2, the Federative Republic of Brazil is the fifth largest country in the world. Its population is more than 170 million inhabitants (census 2000), and it has a Gross Domestic Product (GDP) of around US$500 billion. Brazil has historically been characterized by major social and economic disparities and its pattern of inter-governmental relations, even before the institution of federalism, has evolved through alternating phases of centralization and decentralization. The Brazilian federation encompasses three levels of government: the Union; 26 states plus the Federal District; and over 5,500 municipalities. Although its formal discovery by Pedro Alvares Cabral took place only in 1500, the Treaty of Tordesillas (1494) had already legally settled the question of division and possession of the new lands between Spain and Portugal. As the settlement of the land evolved, an integrated system of administration was deemed necessary and the Portuguese Crown divided the territory into 14 hereditary fiefs, or captaincies (Capitanias Hereditárias), “ceded” to Portuguese nobles, who became responsible for their defence and development. The captaincy system has influenced the territorial and political pattern of the country. The first three centuries of European occupation were marked by the presence of scattered population in fortified coastal settlements and, occasionally, military and commercial expeditions, called bandeiras, that expanded Portuguese possessions in the seventeenth century. The boundaries of the country were established by the Treaty of Madrid (1777), leaving only remaining secondary conflicts of delimitation that were settled after independence. From independence, proclaimed in 1822, to the end of nineteenth century, Brazil adopted a monarchical regime (headed by two descendants of the deposed Portuguese monarch) as the only political regime that could preserve the two basic elements of the colonial system deemed necessary to the maintenance of the dominant landed aristocracy—slavery and a unitary political-administration. Although this period was characterized by political and administrative centralization, it was also a time of consolidation of the power of regional elites whose economic success was not matched by political participation. Immediately after the military coup d’état that ended the monarchy in 1889, the republican alliance adopted a federal system in which the provinces of the empire were transformed into states. The parliamentary system was replaced with a presidential one, a bicameral Congress (Chamber of Deputies and Senate) was created, and a completely independent Supreme Court was created. The federal regime, incorporated by the constitution of 1891, accorded great political autonomy to the already economically powerful state elites. The federation, however, was only consolidated during the presidency of Campos Sales (1898-1902). Known as the “Governors’s Politics” (Política dos Governadores), the Brazilian oligarchic version of federalism meant, in fact, a pact between state elites and the President of the Republic. According to this pact, in exchange for the non-intervention of the Union government in the states’ internal affairs, the members of National Congress would approve all presidential initiatives. As the system evolved, it resulted in a peculiar federative party system in which there was only one political party in each state (all called “republican”). The system was supported by systematic electoral fraud. Contested presidential elections in 1929, led to revolution in 1930. Revolutionary forces installed a Provisional Government (1930-1937) that reduced the autonomy of the states through the imposition of “interventores”. These interventores were politico-administrative managers of the states who were appointed by Getúlio Vargas, a defeated presidential candidate and leader of the movement. In November 1937 Vargas led another military coup that centralized political power in the President’s hands. During this dictatorial regime, known as “Estado Novo”, the autonomy of the states was officially abolished. The overthrow of the “Estado Novo” by military officials in 1945 reinstalled a federal regime associated, for the first time in the Republic’s history, with a competitive national party system. During this period, state governorships became highly disputed political assets because of their importance for the presidential elections. This peculiar federative dynamic is one of the reasons for the easy political success of the 1964 military coup. The heated dispute of the Governors of the greater states (Sno Paulo, Minas Gerais, Guanabara e Rio Grande do Sul) around the coming 1965 presidential election played an important role in the institutional weakening of President Jono Goulart’s authority. The distinguishing characteristic of the military regime installed in 1964 was that it maintained several representative constitutional provisions, including the federal provisions and the regular election of the Governors (albeit indirectly by the state assemblies) and state assemblies. At the national level, the military Presidents were confined to fixed mandates, with no right to seek re-election. Although the armed forces had a decisive influence in their choice of President, their choice had to be formally ratified by an Electoral College composed by the members of the National Congress and representatives of state assemblies. In 1982, the first direct elections for state governments since 1965 were held, and the first elections for Congress under a multi-party system. The election of the state Governors before the presidential election influenced the pattern of re-democratization. Between 1982 and 1994 the state Governors were the most powerful elected officials occupying executive posts. From 1990, when Fernando Collor became the first directly elected President of the Republic in 30 years, to 1994 when Fernando Henrique Cardoso became President, the Governors played a major role in national politics, influencing the behaviour of federal deputies especially through the exercise of patronage or manipulating their chances of re-election. The increased predominance of state interests in the federal regime culminated in the creation of the Constitutional Assembly (1987-88) in which the state and municipal governments consolidated the process of fiscal decentralization initiated in the late 1970s. However, this process of political and fiscal decentralization coincided with the crisis of the “Developmental State”, based on import substitution and industrial protectionism. The 1980s, and the first half of 1990s, were largely characterized by inflationary surges, debt and economic stagnation. The economic crisis, that affected first and most the national government, combined with the decentralization of revenues contributed to it, severely reduced the capacity of the Union to coordinate the inter-governmental relations in Brazil. The centralization of power in the federal government that had been the most important instrument of management of Brazilian federalism since the 1930s, has given way to a disorganized process of decentralization in which the states and municipalities behave like “predators” of a politically and fiscally wounded federal government. 2. Constitutional Provisions Relating to Federalism The republican regime in Brazil—except during the authoritarian periods—has been marked by two general characteristics: 1. a plebiscitary presidentialism in which a strong President is sided by a symmetric, bicameral, multi-party and regionalist, legislative power and an independent judiciary; and 2. a federative system which reproduces the presidential division of powers at the state level (except that there are no state senates) and accords considerable constitutional autonomy to states and municipalities. As we can see, the Brazilian federalism is marked by the complex combination of these majoritarian and consociative institutional arrangements. The 1988 constitution has detailed provisions about the political, administrative and fiscal organization of the federation. Article 18 defines the Federative Republic of Brazil as composed of the Union, the States (26), one Federal District (Brasília) and the Municipalities (approximately 5,500). All of them are autonomous in their own jurisdiction. The constitution also provides (paragraphs 3 and 4) for the possibility of the creation of states and municipalities, subject to the approval of the concerned population, by means of plebiscites, and of the National Congress (or the state assemblies in the case of municipalities), by means of specific laws. However, these legal constraints have not impeded the creation of over 1,300 new municipalities between 1988 and 1997. Articles 20 to 25 establish the division of powers between the members of the federation. The constitution (Article 25, paragraph 1) provides the states with residuary power—i.e., all the powers which are not specifically reserved for the federal government or assigned to the municipalities. However, the detailed and extensive definition of the Union’s constitutional powers (Articles 20 to 22) have limited the exercise of this power by the states. Article 23 is one of the constitutional provisions that could be crucial to the configuration of a cooperative pattern in inter-governmental relations as it lists the several powers that should be exercised in common by the Union, the states and the municipalities. The supplementary law that should establish the rules for inter-governmental cooperation, however, has not up to now been approved by Congress. Article 24 defines the powers that should be concurrently legislated by the Union, the states and the Federal District. These powers include, inter alia, education, health, social assistance and environmental protection. However, as the Union’s legislation over-rides state and municipal legislative powers, there have not been substantial opportunities to exercise concurrent legislation by sub-national governments without federal consent. Unlike most other federations, the Brazilian constitution provides detailed rules for the management of the over 5,500 municipalities that are autonomous in strictly local affairs. Each municipality operates under its own constitutional provisions, called Organic (Basic) Law, which must be approved by a qualified majority in the Municipal Council (Article 29). The federal executive is headed by the President of the Republic. A constitutional amendment (1997) permits the President and the Vice-President to seek re-election, but they cannot serve more than two consecutive terms. The President appoints the State Ministers who are directly responsible to him and who he may dismiss at any time. Unlike most presidential regimes, members of the National Congress may be appointed as Ministers (or to any other political position in the federal administration). The President of the Republic has important powers in the legislative process. Thus, for example, Article 61(1) defines the cases in which the President has exclusive initiative to introduce laws in financial and budgetary matters, and Article 64(1) provides that the President may request urgency in the examination of bills of his own initiative. Article 66(1) authorizes the President to veto a bill that was approved by the Congress, and Article 66(4) states that a presidential veto may only be rejected by an absolute majority of Deputies and Senators by secret voting. The representation of state’s population in the union is provided by the election of the members of the Chamber of Deputies for a four-year term through a system of proportional representation. The representation of the constituent units in the central government is guaranteed by the election of three Senators from each state and the Federal District. Senators are elected for a term of eight years. Both Deputies and Senators can stand for re-election without restriction. The current legislature (51st) has 513 members and 81 Senators. One aspect of the political system that affects the actual configuration of Brazilian federalism is the over-representation of the less populated (and less developed) regions of the country in the Chamber of Deputies. This unequal distribution of parliamentary seats results from the constitutional provision (Article 44) which establishes that the states must have a minimum of eight and a maximum of 70 deputies. This provision favours especially the north, the least populated region, in detriment to the southeast, the most populated. The extreme case is the state of Sno Paulo, the richest (35% GDP) and most populated (21%), which should have 111 deputies rather than the current 70. Another important political feature that affects Brazilian federalism is the configuration of the federal Senate. Senatorial representation of the northern, northeastern and centre-western states—which represent 43% of the population—controls 74% of the seats. This fact acquires importance when one takes in account that the Senate has symmetric legislative powers to the Chamber and, most of all, that it has exclusive power to approve presidential nominations and authorize debt margins for the states and municipalities. The Federal Supreme Court is the apex of the judicial system (Articles 101-103). It is composed of 11 Justices who are appointed by the President, and subjected to the approval of the Senate. The Federal Supreme Court is vested with the power to make decisions about constitutional conflicts that involve the members of the federation. The state judiciary follows the federal pattern and has its jurisdiction defined so as to avoid any conflict with the federal courts. Constitutional amendments (Article 60) can only be proposed by: (1) at least one-third of the members of the Chamber of Deputies or of the federal Senate; (2) the President of the Republic; or (3) more than one-half of the Legislative Assemblies of the units of the federation, each by a relative majority of its members. Constitutional amendments (Paragraph 2) must be discussed and voted upon in each House of the National Congress, in two readings, and will only be approved if they obtain in both readings, three-fifths of the votes of the respective members. Four constitutional matters are excluded from amendments: the federal form of state; the direct, secret, universal and periodic vote; the separation of government powers; and individual rights and guarantees. The definitions in the constitution about the national tax system—in contrast to the ones relating to the expenditure responsibilities—are detailed and precise. In fact, the constitutional fiscal provisions resulted in a transfer of tributary revenues from the federal government to the states and municipalities without precedent in the country’s history. Moreover, the 1988 constitution strengthened the already significant tax base of the states and municipal governments. The provisions relating to fiscal federalism are in Title VI (Taxation and Budget). Articles 153 to 159 define the taxes that are exclusive of each member of federation and the procedures for the sharing of tax revenues between the Union and the states and municipalities. The most important taxes pertaining to the states (Article155) are the ICMS, a kind of a state’s VAT, accounting for about 25% of the total amount of taxes levied in Brazil, and the IPVA, a tax on the ownership of automotive vehicles licensed in each jurisdiction. The municipalities can levy two taxes, which has considerable impact on the revenues of the major ones (Article156). They can levy the IPTU, levied on urban buildings and urban land property, and the ISS, which is levied on services of any nature not included in Article 155. In fact, the level of fiscal autonomy of each sub-national government varies greatly with the level of economic development which is highly concentrated in the southeast and south regions. The sharing of revenues among the Union and the states and the municipalities is accomplished through two funds composed of about half the net revenues of the three main federal taxes: the personal (IRPF) and corporate (IRPJ) income taxes and the selective VAT (IPI). The Revenue Sharing Fund of the States is constituted with 21.5%, and the Revenue Sharing Fund of the Municipalities with 22.5% of these net revenues. The distribution of the funds among the states and municipalities is mainly based on redistributive criteria. The trend toward fiscal decentralization can be best seen by examining the distribution of the expenditures by level of government. Sub-national governments account for 62% of payrolls for active civil servants, 71% of other current expenditures and 78% of fixed investments. On the other hand, the central government concentrates its outlays on transfers to persons (basically, social security benefits) and interest on the public debt (respectively, 80% and 90% of the total). 3. Recent Political Dynamics The political event in recent years that has had great impact on the configuration of Brazilian federalism was the election (and re-election) of Fernando Henrique Cardoso. Leading a heterogenous coalition of centre-rightist forces, President Cardoso won the 1994 presidential election against Luis Inacio Lula da Silva, a popular leftist leader. The political mandate of the new President was strongly associated with the adjustment of the chaotic situation of the national economy, particularly the lack of fiscal balance in the public sector. In fact, his greatest political asset as candidate was the successful implementation of a monetary stabilization program, known as “Plano Real”, while in charge of the Ministry of Finance in the last months of President Itamar Franco’s administration (1992-1994). During his first administration (1995-1998), President Cardoso approved in the National Congress an extensive set of legislative measures, such as economic deregulation, privatization, downsizing of the public administration, and reform of the social security system, that radically transformed the relationship between state and society. The effects of the monetary stabilization, particularly the interruption of the inflationary spiral, hit with particular virulence the finances of the highly indebted sub-national governments. The federal government took this opportunity to reverse the adverse balance in inter-governmental relations. The first action in this regard, issued as a Provisional Measure (1.514/96) in 1996, was a program aiming at the reduction of the involvement of the states in financial and banking activity. In fact, since then, all of the banks belonging to the large states have been privatized, liquidated or transferred to the management of the Central Bank. As a compensation, the federal government proposed to the states the “federalization” of their debts—i.e., the consolidation, refinancing and transference of most of the state debts to the National Treasury. In addition, restrictive clauses were included in refinancing contracts that suspended all issues of new state or municipal security debt. These measures, which complemented the program of macro-economic stabilization, severely constrained the fiscal and financial autonomy of the states. Up to this time, the states had exercised a “quasi-monetary authority” through the uncontrolled issue of papers in the financial market, and were systematically bailed-out by the federal monetary authorities. Another important law in the same area (Supplementary Law No. 96, 1999) established ceilings on the expenditures on the personnel of federal and sub-national governments, and the ceilings are different for each level of government. Finally, the federal government sent to Congress, and got approved in the middle of 2000, the Fiscal Responsibility Law, inspired by the Fiscal Responsibility Act in New Zealand. This law imposed maximum limits on the debts and personnel outlays of the federal government, states and municipalities. Among other provisions, the new law requires that all levels of government formulate and publicize three year targets, prohibits the federal government from formalizing new operations that bail out state and municipal debts and applies hard sanctions (including criminal ones) to those responsible for the misuse of government monies. Besides the fiscal adjustment program, two others reforms have had some impact in the inter-governmental relations. First, a constitutional amendment (14/96) created a fiscal fund—composed of state and municipal revenues—to finance, in redistributive (per capita) terms, the basic public educational systems (called FUNDEF). And second, in the health sector, the federal government has recently instituted a fund that provides direct monetary transfers for basic municipal health programs based on per capita criteria. In sum, the reforms implemented during the two Cardoso administrations have transformed the pattern of inter-governmental relations and increased the coordinative capacity of the federal government, without recourse to authoritarian centralization practices. Yet, several problems persists that will challenge Brazilian federation in the next years. The most important of all is the protracted tax reform that was designed to reduce distortions like cumulative charge and regressivity, and curb incentives for fiscal war among sub-national governments. 4. Sources for Further Information Valeriano Mendes Ferreira Costa, with Fernando Abrucio and Konrad Adenauer, Reforma do Estado e o Contexto Federativo Brasileiro (Sao Paulo: Stiftung, 1998).