[ foresight ] third quarter / 2009

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global ®

hr issues affecting your business

[ Brazil ]

u.s. and brazil search for the

right risk balance in a global
and interdependent economy

By Eder C. da Costa e Silva and Albert R. Phelps, Jr.

16 third quarter / 2009

Governments, employers, and employees view risk and their ability to manage it in

different ways. Most governments focus on stability and adopt policies that attempt to

minimize risk and maximize security for their citizens. However, government policies

can have a major impact on the risks employers and employees face when those

policies ignore global influences outside a particular country.

As the impact of decisions made by governments and companies become more

global, individuals have adjusted their views of risk. This article compares

individuals’ attitudes toward risk and risk management in the United States and

Brazil. Specifically, it looks at the conditions that shaped corporate and individual

citizens’ attitudes toward inflation, interest rates and credit, choice and government

intervention, and the stock market.

Today’s economic situation has caused many in the United States to question long-held

beliefs, while Brazil’s stability now allows a more long-term view of risk. This article

also compares how those views in these two countries have changed in the past decade

and, in fact, seem to be converging.

global ®
17
[ Brazil ]

Brazil and the continental United States are similar By comparison, with Brazil’s inflation rate of up to
in land size but differ in economic profile, language, 916 percent in 1994, individuals and companies there
and culture. However, the disparity in the economic learned to adapt their spending for price volatility and
profiles of the two countries has significantly lessened limited availability of credit.
over the past 10 years. (See “U.S.-Brazil: A Decade of
In contrast, Americans have had easy access to credit,
Comparisons and Contrasts” below). Although Brazil
including long-term mortgages, corporate bonds at
has felt the impact of the current global financial crisis,
reasonable interest rates, as well as credit cards and
cautious economic policies instituted by its government
home equity loans for short-term debt. As individuals
since 1994 have made the impact of the crisis much less
and companies in the U.S. adjusted their spending over
severe. As a result, Brazil now has two of the 20 largest
time to anticipate the continuation of easy credit, the
banks in the world according to the Financial Times of
ability to weather economic downturns became more
London and is positioned to become the world’s fourth
difficult. Companies shifted to short-term views of risk,
largest economy by 2050 based on its gross domestic
and individual savings plummeted. A May 2009 Wells
product as projected by Goldman Sachs.
Fargo survey showed that 24 percent of individuals
did not have any savings to cover their living expenses
US-Brazil: A Decade of Comparisons
if they lost their job. Although individuals have
and Contrasts
recently started to increase their personal savings
Element 1999 2009 rate, it is still well below the eight to 10 percent
US Brazil US Brazil savings rates reported before 1985 by the U.S. Bureau
Inflation (CPI) 2.2% 8.9% -2.1% 4.5% of Economic Analysis. Despite lower interest rates,
Government bonds 5.85% * 3.55% 6.4%
tightened credit markets currently limit the ability
Equity returns 20.2% 18.1% -28.1% -18.7%
to increase or re-negotiate debt and will result in
GDP growth 4.5% 0.2% -3.9% -1.8%
more problems for those, including the unemployed,
Unemployment 4.2% 9.6% 9.4% 8.1%
whose spending exceeds their income. Individuals will
Life expectancy (M/F) 72/79 64/71 75/80 67/75
* No long terms bonds where issued prior to 2000. delay their retirement, further increasing pressure on
employers to balance the need for experienced workers
Sources:
with advancement opportunities for younger employees.
Element US Brazil

Inflation (CPI) U.S. Bureau of Labor Statistics IBGE – Instituto Brasileiro de

While inflation still remains low in 2009, government
(CPI-U headline) Geografia e Estatística (IPCA)
spending to stimulate the economy seems certain to
Government bonds U.S. Department of the Treasury ANDIMA – Associação Nacional
(Daily Treasury Yield Curve das Instituições do Mercado increase inflation in the future.
Rates/10yr) Financeiro (NTN-B)

Equity returns S&P 500 Index BOVESPA Stock Index

The high inflation era in Brazil impacted mostly the
GDP growth U.S. Bureau of Economic Analysis IBGE – Instituto Brasileiro de
Geografia e Estatística standard of living for low-paid workers. Without bank
Unemployment U.S. Bureau of Labor Statistics IBGE – Instituto Brasileiro de
Geografia e Estatística
accounts, they did not have access to the interest
Life expectancy (M/F) UNDP – United Nations UNDP – United Nations products banks offered to help individuals protect
Development Programme Development Programme
their finances. As a result of those high inflation years,
Brazilians refer to salaries on a monthly basis and
Inflation, Interest Rates and Credit have a short-term mindset. Interest rates of up to

Inflation and the ability to maintain one’s standard 45 percent (BACEN – Brazilian Central Bank) paid on

of living concern individuals around the world. The government bonds distorted risk assumption in Brazil,

United States has not experienced double-digit inflation making fixed income investments more attractive than

since the early 1980s; in fact, annual inflation has the stock market. On the other hand, high interest

been less than 4 percent in each of the past 15 years. rates made credit and home mortgages expensive and

18 third quarter / 2009

available only for short-term periods. Individuals had
only their income and savings as a source for spending,
and purchasing a home was not possible for most. The
business world shifted its focus to short-term cash
management because of the money to be made from
high government bond rates. For example, insurance
companies made more money from asset management
than selling insurance.
Increased financial stability in Brazil resulted from many
changes and reforms that helped the economy weather
the global financial crisis. Inflation has dropped to about
4.5 percent (Focus Research\BACEN-Brazilian Central
Bank) and the overnight interest rate dropped to 8.75
percent in July (BACEN – Brazilian Central Bank). With
inflation under control, individuals are adjusting their
spending behaviors, and companies are changing the
management of their balance sheets and retirement
fund strategies. Cars once financed for 60 months can
now be paid for over 80 months. Banks are expected
to offer home mortgages for longer periods and with
lower interest rates, which will help middle-class people
acquire a first home. The leverage once provided by
interest rates in excess of inflation is diminishing,
and companies will have to shift their focus to long-
term operational results. Brazil has only started the
process of development and sophistication in financial
markets but can learn from the mistakes made by more
developed economies.
Choice and Government Intervention
Individual choice and flexibility, including limits on
government intervention, are fundamental tenets
of American culture. However, choice nearly always
has a cost and often increases the risks assumed by
individuals. Some U.S. examples include:
! Defined contribution (DC) retirement plans have an
average of 17 investment fund choices, although
many individuals have only basic levels of financial
literacy. Behavioral economics has shown that too
much choice causes people to not act, because
making a choice is too complicated. Automatic
enrollment and default fund choices in DC plans help
address these concerns before retirement, but they
do nothing to help individuals manage other risks
following retirement, such as how long they will live
in retirement and with what quality of life.
! The current U.S. healthcare system includes complex
choices of plans and multiple cost structures,
without providing higher quality care. Avoiding
government intervention is at the core of much of
the resistance to change by healthcare providers
and employers. The impact of expected 2009
legislation on the costs and risks assumed by
individuals, employers, and society will take time to
be known.
! The U.S. government has provided limited and
fractured oversight to companies, especially
to financial institutions which, it was generally
assumed, would be self-regulated by market forces.
But the credit crunch and housing bubble that
started the financial crisis showed that executives
were often incented to take short-term views of
risk. Some U.S. companies such as General Motors
and Lehman Brothers have received government
loans or had direct intervention by the government.
Resulting legislation on pay and employment
practices for troubled companies is likely to impact
governance structures for all companies.
Conversely, from 1964 to 1985, Brazil’s military
government placed many restrictions on individual
freedom of choice, and government intervention had
almost no limits. Although almost 25 years have passed
since democracy was reinstated, society takes time
to re-incorporate choice into its culture and to restrict
government intervention. The global economic crisis
and recent corporate governance scandals have shown
Brazilian society that a proper balance of government
intervention and limits to freedom of choice can protect
companies, individuals, and the country’s economy
as well. The stabilization of the Brazilian economy is
expected to accelerate the move toward greater risk to
individuals, which usually comes with more choice.
(Continued on page 30)
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19
U.S. And Brazil Search for the Right Risk Balance in a Global and Interdependent Economy
(Continued from page 19)
Following are some examples:
! Because of the high real interest rates (above
inflation) available on investments, few retirement
plans provide choice on investments. With the
decrease in interest rates, retirement funds will need
to add stock investment choices, which are riskier.
Retirement funds currently have to comply with a set
of rules that limit maximum investment in equities
to 50 percent of total assets (no more than 4 percent
in a single company), real estate to 15 percent,
and participant loans to 5 percent (MPS – Brazilian
Social Security Ministry). The Brazilian government
is considering higher limits on equity investments
and ways to incent employers who provide financial
education to their employees. As DC plan participants
have more choice, companies will face the challenge
of helping employees deal with more risks in their
retirement plans, especially given the very low levels
of financial education.
! The supervision of Brazil’s financial sector, including
the investment banks, mortgage institutions and all
types of credit, is concentrated in the Central Bank.
The CVM (Comissão de Valores Mobiliários, similar to
the U.S. SEC) oversees the stock market through rigid
rules. Banks have always complained about the high
levels of reserves they are required to keep in the
Central Bank, but these reserves helped the Brazilian
financial system withstand the global credit crunch.
Sub-prime loans do not exist.
Stock Market Exposure
The stock market’s volatility and its impact on the general
economy are having a major effect on most individuals in
the United States. According to the Investment Company
Institute, more than 50 percent of U.S. households
own equities, primarily through employer-sponsored
retirement plans. As companies shifted the responsibility
to save and invest to individuals, the need to manage
retirement investments — and associated risks — have
increased tremendously. Young people whose time
horizons permit short-term volatility of markets often
invest too conservatively, while older people frequently
30 third quarter / 2009
invest too heavily in company stock, perhaps a result of
a false sense of security about the company for which
they work. Because of the current economic crisis,
companies have cut their contributions to retirement
plans. In addition, we may see lower contribution rates by
employees and more conservative investment strategies
become popular.
According to the Brazilian Pension Funds Association, the
ABRAPP, 66 percent of retirement funds were invested
in fixed income and only 28 percent in equities at the
end of 2008. As a result, retirement assets decreased
only 1.6 percent last year in Brazil compared with an
average global loss of 19 percent (according to the OECD).
With Brazilian interest rates now below 10 percent,
stock market investments are likely to become more
popular but the incentive for people to save may decline.
Fortunately, these challenges result from the many
changes and reforms made to the Brazilian economy over
the past 20 years and not the global financial crisis. But
such achievements will change the future face of risk
in Brazil.
Conclusion
In this article, we have highlighted only a few
areas of risk. Today’s challenge is to find the right
balance between the risks managed by government,
organizations, and individuals. Too much government
intervention can drain creativity and impede individuals
and organizations from developing. Too much flexibility
can encourage individuals and organizations to take on
excessive risk. By comparing the histories and experiences
of the United States and Brazil, we can gain insight that
will help all parties better manage future risks.
About the Authors:
Al Phelps is a Chicago-based Principal in Global
Consulting at Buck. He can be reached at
albert.phelps@buckconsultants.com.
Eder da Costa e Silva is a Sao Paulo-based
Partner Consultant at OTBX Soluções, a Brazilian
affiliate of Buck. He can be reached at
eder@nkl2.com.br.
Publisher Yungchai Kim
Editor-in-Chief Pete Costigan
Designer Jim Sullivan

Articles in this edition of Global View were written by Buck Consultants. In addition, the article comparing Brazilian
and U.S. attitudes toward risk and risk management was co-authored by Eder da Costa e Silva from OTBX Soluções,
a Brazilian affiliate of Buck, and the article on high performers in China was authored by Luke Wardle from Human
Capital Group, a Chinese affiliate of Buck.

Information regarding services offered by Buck Consultants may be obtained by contacting your Account Manager or
the Global Consulting Department at:

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Global Consulting Department
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Secaucus, NJ 07096-1533
Phone: +1.201.902.2885
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Copyright © 2009 by Buck Consultants, LLC

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This communication is published by Buck Consultants to keep our clients and friends informed of developments in
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