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Political

Public policy makers have reduced Latin America's most serious inflation, set in motion the worlds largest privatisation effort and begun to reform everything from education to human rights (Euromonitor, 1998). This is clearly encouraging for potential entrants to the Brazilian market.

AG Barr should be aware that for many years the Brazilian economy has laboured under governments that have provided poor leadership and poor implementation of policies. "It (is) vital that the crisis of government ends….with good leadership Brazil will quickly become an economic powerhouse" (Euromonitor, 1992). Brazil's political system is highly fragmented, which has resulted in much political wrangling. (The Economist Intelligence Unit Limited, 1998 a and b)

Excessive documentary requirements for relatively minor items create burdensome levels of red tape, and compliance imposes high administrative costs. The government is proposing to restructure the tax system with a special focus on reducing such paperwork (KPMG, 1998). If implemented, this will clearly be of benefit to businesses operating in or exporting to Brazil. However, the previously mentioned issue regarding the government's difficulties in executing such policies must remain a concern.

Economic

Brazil is the world's eighth largest economy (Euromonitor, 1998). It is attractive for both its immediate and long-term growth prospects. "Brazil's potential to become a global economic and industrial powerhouse is enormous". (The Economist Intelligence Unit Limited, 1998a). This view is supported by the view that "Brazil is hard to overlook for the long-term investor." (KPMG, 1998).

The Macro-Economic Environment

Brazil has been in transition from a state-dominated protected economy to a free-market system since 1990. Although the economy is huge and dynamic, it was mismanaged for years, mainly as a result of political negligence. It is now being restructured and opened up to competition, which is bringing results that suggest even greater promise for the future. The stability that came with the introduction of the latest economic plan and a new currency, the Real in July 1994, enhanced Brazilians' spending power and under-scored the country's position as the dominant market in Latin America. Inflation has been slashed and growth, although constrained by a tight monetary policy, has been steady.

If Brazil is to achieve lasting economic stability the government must consolidate economic reforms and bring about a restructuring of public administration, fiscal and social security areas. Much of this however is obstructed by political wrangling and a fragmented congress, which results in an on-going environment of economic risk. In the absence of permanent structural changes to tackle the root causes of inflation and instability - namely, chronic fiscal deficits - Brazil will remain vulnerable to devaluation, sudden economic slowdowns, financial volatility and external shocks (The Economist Intelligence Unit Limited, 1998a).

In 1998 GDP in Brazil stood at US$768.8 billion and real GDP growth was 0.8 in 1998. It is forecast that the economy will suffer a deep recession in 1999 with Brazil's GDP growth of -2.0% ranking 13th in the 20 slowest growing countries (The Economist Intelligence Unit Limited, 1999b), however a strong rebound of growth is anticipated in 2000 (Financial Times, 1999).

"Custo Brazil" is the term used for the differential in production costs that companies incur in Brazil and not in other countries. Although the Brazilian authorities are attempting to eliminate the "custo", companies will probably have to deal with them for some time to come. High corporate taxes (basic income tax of 15%), exorbitant interest rates, costly labour laws with over-regulated hiring and firing, and add on labour costs more than offset low