Estimating the end

of the FGTS on
Brazilian output.

Leonardo Stoppa

Word count: 5104

(299 in graphics)

Estimating the end of FGTS on Brazilian output. 2

Contents Page
1. Introduction 4
2. Literature review 4
2.1. Supporting the end 4
2.2. Supporting the continuity 6
3. Graphic demonstration 12
3.1. Method 12
3.2. Limitations of this analysis 12
3.3. The propensity to invest 13
3.4. Using standard diagrams 15
3.5. Aggregate analysis 17
4. Conclusions 19
5. Appendix 1: CLT: The Brazilian Employment Law 21
6. Appendix 2: What is FGTS? 22
7. Appendix 3: Why is the end of the FGTS considered? 23
8. Appendix 4: Dweck and Haddad. 24
9. Appendix-5: "my mansion my life" 25
10. Appendix-6: Printing money for inflation 25
11. References 26

Figures Page
1. Propensity to invest 14
2. Corporate borrowing and investment and the future output 15
3. Present investment and future output (with FGTS) 16
4. Present investment and future output (without FGTS) 16
5. Present investment and future output: Change in output due to a 17
change on interest rate
6. Corporate intertemporal production function and production 18
possibility frontier for the whole economy and its mirrored version
7. Savings and investment equilibrium 18

Tables Page
1. Propensity to invest 13
2. Marginal propensity to invest and accumulated interest rate paid 15

Estimating the end of FGTS on Brazilian output. 3

1. Introduction
This essay estimates, using the theories learned on DD309, the possible
effects of the end of the compulsory deposit FGTS in the Brazilian financial
market equilibrium. Firstly, a comparison will be made between theories that
support the end of the FGTS against theories that support the continuity of the
deposit. The literature review will be constructed in order to support, based on
the scientific theories, the empirical arguments that sustain popular debates
on the subject. In order to justify the end of the FGTS, the neoclassical idea of
the invisible hand will be brought in, complemented by the argument of some
liberal schools about the inefficiency of the state in achieving a common good.
The continuity of the fund will be supported primarily by the importance of its
social role, secondly, by emphasising its importance as an economic stabilizer
and source of liquidity, forcing a drop in interest rates in the financial market.
The focus of this work is the analysis of how this change would impact on
future output, which according to the economic theory learned on DD309, is
directly related to the interest rate practised on the market. The last part will
apply the analysis of savings and investment over time to demonstrate that if
such compulsory deposit were extinguished, the financial market would force
a reduction on future output.

2. Literature review
2.1. Supporting the end
According to the neo-classicists and Austrians, any kind of centralised control
in the economy only tends to create distortions, generating even greater
problems than those of a capitalist system (HAYEK, 1945 apud Simonetti Et
al, 2010), In this sense, their followers advocate for the reduction of the state
and the end of regulations and protective laws. They argue that the Brazilian
government's attempt to protect its workers ends up raising unemployment
levels by reducing employability of the market. Since the compulsory deposit
FGTS is an additional cost to the employer, it works reducing employment in
the short term and would discourage the investment of the companies.

Estimating the end of FGTS on Brazilian output. 4

 While the generous labour market regulations benefit those workers inside the
formal labour market, they may also lead to lower aggregate employment, limited
labour force mobility (flexibility), reduced labour productivity and limited adoption
of new technology.(Heckman (2003) apud Workd Bank, 2005, p. 107)

According to the standard neoclassical theory of production, it is possible for

the company to choose various combinations of resources {labour,capital},
that strategically combined can reach the production of a same quantity of
products {isoquants} (Simonetti, 2016, p. 196). Based on that theory, World
Bank (2005) argues that the FGTS, by raising the cost of {labour} by 8%,
would encourage the entrepreneur to adopt technique more capital-intensive
that would result in fewer jobs offered.

The anti-FGTS lobbyists also argue that the financial market offers investment
options with higher returns than the government bond (that indexes the FGTS
today), and that private agencies would defend investors' interest more than a
state bank. They argue, nothing more just than to leave the decision on the
hands of the workers, that could start from a investment on a private pension
scheme, to the investment in the stock market. In an article entitled "Why I am
against the FGTS" posted on InfoMoney, Plcido (2016) argues: "Let the
worker take care of his money or raise the worker's return. The right of the
worker to manage his money", and after, presents a calculation that has
become mantra on this debates:

"Let's count:

A) Using the FGTS, at the end of 16 years the worker would have a balance of
R$ 23,560.00 in the FGTS account;

B) Using the correction for inflation, the worker should have a balance of R$
28,637. That is, the FGTS did not correct inflation either; and
1
C) Using the average Selic rate, with a return of 80% of interest (eg if the
1
average Selic in 2015 was 13.37%, the return would be 10.7%), considered an
ultra conservative investment, the balance Final after 16 years, would be R$
51,187, or 117% above the FGTS." (Plcido, 2016)

_____________
1_SELIC: Rate for monetary policy.

Estimating the end of FGTS on Brazilian output. 5

Finally, there remains the political critique of the corruption in the public
companies that use resources from the FGTS. It is argued by the Austrians
that every state administration of public assets opens ways to corruption,
which ends up creating a class of public money leeches. The State, () is a
social institution, forced by a victorious group of men on a defeated group,
() this dominion had no other purpose than the economic exploitation of the
vanquished by the victors. (Oppenheimer, 1915 apud Rothbard, 2009 p. 16-
17). Following the same argument in more recent work, Buchanan (1993)
disputes the capacity of a state to act in the best public interest, once again
drawing attention to the preponderance of the particular interest of rulers.
When extended over the whole political process, tends to shift results away
from, rather than toward any meaningful conception of public interest. (Apud
Mackintosh, 2010, p. 458). The biggest criticism today in Brazil is about the
benefit of some groups over others, a kind of inefficiency that Mackintosh
(2016) explains as being a challenge for the current models of decision-
making regarding the use of public money.
Much government decision making therefore creates rents. () Rent-seeking
includes lobbying for positions and contracts, campaigning for policies that
create rents, and the giving of favours and bribes to public officials and
politicians by rent-seekers. Such rent- seeking is socially wasteful if, for example,
it merely transfers rents between individuals, rather than improving outcomes for
consumers, or if it is associated with incompetent provision, because positions
are bought and sold rather than appointed on merit. (Mackintosh, 2016, p. 471)

2.2. Supporting the continuity

Although known as worker's right, the FGTS is also an important mechanism
of economic and contractual stabilisation. The FGTS was born as an
alternative to the stability regime that the employees made right when they
reached 10 years of work in the same company. This regime, which was
definitively abandoned in 1988, motivated the dismissal of employees close to
reaching stability. The FGTS brought contractual security, both to the
employer who previously lost the right to dismiss the employee after reaching
stability, and to the employee who became entitled to a compensation for

Estimating the end of FGTS on Brazilian output. 6

dismissal. In practice, the more veteran is the employee, the more expensive
it will be to dismiss him, but dismissal without motive is no longer prohibited,
as it was in the stability regime. (CAIXA-f, n.d.)

In microeconomic terms, the FGTS serves as a pension to be used by the

employee at the time of his retirement, serving alternatively as a financial
resource available to the worker in the event of an exemption. As the fund
was created at a time when the government pointed to the high housing deficit
as a major social problem, the fund was born with its use designated to the
financing of construction, so, although employed, the worker can make use of
his FGTS for the payment of their home (CAIXA-f, n.d.)

In social terms, the FGTS serves as a source of support for the unemployed
worker, also serving as a macroeconomic stabilizer in the sense that it
maintains the possibility of consumption at the beginning of the
unemployment cycles, according to a study carried out by Costa (2010).

As the number of months that the FGTS withdrawals maintains the wages of
the dismissed workers is approximately 2.3 months, it is concluded that the
worker has his guaranteed income - and therefore, the consumption of the
economy is maintained part of the period of unemployment. (COSTA, 2010, p.
26)

Still in social terms, (Biancarelli and Conti, 2015) indirectly define the FGTS
as an application of Keynesianism in the Brazilian economy. Conceived with
resources focused on civil construction, the project seeks primarily to
encourage product and service supply focused on housing construction and
the development of national infrastructure. In parallel, the aim was to
encourage direct and indirect jobs in the construction industry, since at that
time Brazil had workforce available, but no stimulus had been created in order
to break the productive inertia. (CAIXA-s, s/d).

Although attractive when evaluated in an empirical way, we can observe that

in the light of economic theories, the idea of ending the FGTS as a
compulsory deposit and its eventual monthly transfer to the worker as part of
Estimating the end of FGTS on Brazilian output. 7
his salary is a measure that can cause enormous social damage. Dweck2
draws attention to the fallacy of composition built into the lobby against
compulsory savings. "If everyone benefits alone, he will end up generating
such chaos that he will not benefit himself". (DWECK, 2017) Haddad2 adds
that entrepreneurs who support this type of measure "are unknowingly
supporting a shrinking of the domestic market with these reforms" (HADDAD,
2017). In this way, it is clear that lobbyists are interested in producing for the
international market, sacrificing the purchasing power of the Brazilian
population. "What is emerging now is a resumption of this process that sees
the development linked to the foreign market and foreign capital (HADDAD,
2017).

It is important to analyse the effects of this proposal on the financial market at

the macroeconomic level. Studying this change as an immediate increase in
the amount of money in circulation in the Brazilian economy, it is concluded
that even if the employee's salary receives an increase of 8% in response to
the end of the FGTS, this value would cease to exist in practice, as explained
by Rabin Money, alone among all goods, lacks a specific market of its own
where supply and demand meet and determine a specific price. (RABIN,
2004 p. 10)

Once the disturbed market returns to equilibrium, any attempt to press for
further increases would imply a new inflationary cycle, as explained by
Howells and Santos (2015, p. 282) Higher wages agreed between workers
and firms put pressure on the prices of goods and services, stirring up
inflation. In practice, such a theory asserts that by setting wages above the
market, traders and producers would tend to raise their prices in an attempt to
regain the old profit margin, which would force a generalized rise in prices.

____________
2_Appendix-4

Estimating the end of FGTS on Brazilian output. 8

Applying such theories to the proposal to convert the FGTS deposit into a
monthly transfer, we can expect that, immediately after that change, the larger
amount of money in circulation would force a new market equilibrium, and this
wage increase would be neutralised by the effects of inflation, leading the
worker to the same purchasing power as he had before.

Another inconsistency lies in the illusion that distancing the state could result
in a change in social behaviour. Creating awareness campaigns to work
against conspicuous consumption can be even more costly. On the other
hand, leaving the decision to save or not on behalf of the worker would imply
a choice between the loss of the economic stabiliser or an increase in interest
rates. As explained by the neoclassical theory, to stimulate saving on by part
of households, the financial market will have to raise the interest offered to the
savers, (Himmelweit and Stone, 2016) so, the savings culture would be
conditioned to an offer of financial compensation greater than that offered
today, which suggests an increase in interest rates as a result of trying to
promote voluntary savings.

As a result of this lobby for lowering the state, we can note that the reality
lived in developed countries shows us that there would be only a transfer of
the responsibility of the private to the public sector regarding the costing of
social benefits. The FGTS, now financed by the private sector, is responsible
for covering an average 2.3 months of consumption of an unemployed worker
(Costa, 2010). Ceasing to exist, the economic and social stabilisation
provided by this type of fund should, under penalty of jeopardising the
financial system, be replaced by governmental measures similar to Job
Seekers Allowance complemented by benefits such as Housing Benefit.
Unlike the FGTS, which is paid by the employer, the social benefits funded by
the taxpayers would tend to suffer even more criticism from the public.

Regarding the criticism related to how the money raised by the fund is used
as well as eventual cases of corruption, it is asked firstly if it would not be
more appropriate to attack corruption instead of ending a project, since
doesnt make sense to decide to sacrifice the patient as an alternative to
Estimating the end of FGTS on Brazilian output. 9
treatment. On the investment side, the FGTS has its resources applied
directly to civil construction, but indirectly reflects in the generation of jobs. As
Keynes (1936) demonstrated, the state stimulus in infrastructure also reflects
on indirect benefits, generating results higher than the initial investment.
(Cited in Trigg, 2013)

The administration of the FGTS is carried out by CAIXA (a estate owned

bank) through a council composed of representatives from all interested
sectors. "The Council is a tripartite collegial body made up of entities
representing workers, employers and representatives of the Federal
Government." (CAIXA, 2017) Despite having its resources focused on the
construction industry, CAIXA makes use of diversification as a form of risk
reduction, offering loans among public administration, poor families and
construction companies. In exceptional situations such as the crisis of 2008,
there were even investments in the financial market, but the risk on the
administration of the funds is assumed entirely by the custodian bank and
never shared with the FGTS. (Biancarelli and Conti, 2015).

According to a study carried out by CAIXA-g (n.d.), all these loans tend to
benefit the workers by stimulating the offer of products in the construction
industry. The direct social effects is the ease house ownership, both, by
subsidizing constructors, as by lowering the interest rate and ease access to
the credit3. Indirectly, the society has the increase on demand for jobs, direct
and indirect.

"In the basic sanitation sector, which is essential for improving the quality of life
of the population and whose investments in construction also enable the
permanent generation of millions of jobs, FGTS has been the main responsible
for much of what was done in the country" (CAIXA-s, n.d., p. 30)

__________________
3_Appendix-5

Estimating the end of FGTS on Brazilian output. 10

The part of the fund intended for large contractors serves federation entities in
the sense that it provides low-cost loans to finance sanitation infrastructure
and other civil construction works. (CAIXA-s, n.d.) When funds are available
in the FGTS, they can be borrowed to countries with which Brazil has
advantageous terms of trade in order to finance the work of Brazilian
contractors abroad.

Finally, it is necessary to comment on the suggestion that it would be up to

the worker to choose how best to invest his own money. When we think of
workers left on their own as investors in private banks, we can use the
principal-agent theory to this case and raise the information asymmetry as an
obstacle to the actual realization of the interests of the workers as a whole.
The problem, as in most cases where a principal delegates decisions to an
agent, is that it is not possible to write a contract that covers every eventuality
and ensures that the agent always acts in the best interests of the
principal.(MILNE, 2012, p. 195)

In the same manner, it would be too much to expect the ordinary worker (a
great majority of those employed by the CLT4 regime) to have sufficient
knowledge to choose among the various options that would be available in the
market. As explained by Milne (2012, p. 184) Capital markets do not just
allocate resources between savings and investment. They also allocate
savings and investments between low-risk and high-risk opportunities.
Despite its low profitability compared to other options in the market, it should
be noted that FGTS is a risk-free investment that, when assessed in the light
of the risk-return-trade-off, it is clear that for a risk-free investment and
financial speculation, the expected return is a lower yield (Milne, 2012, p.
184). The guarantee offered by the fund deposited in a public bank is not
limited to monetary correction, since in the eventual collapse of the financial
system with consecutive bankruptcy of private banks, all investors would be
left to fend for themselves. In the case of the FGTS, the worker's investment
is guaranteed by the body responsible for issuing the national currency.5
________________
4_Appendix-1
5_Appendix-7

Estimating the end of FGTS on Brazilian output. 11

3. Graphic demonstration
3.1. Method
This part of the essay uses the capital equilibrium and capital market
efficiency theory to graphically simulate the impact of the end of the FGTS on
the investment made by firms in the Brazilian market. The model starts from
the premise that the money supply offered by households to firms will be
larger the higher the interest rate (MILNE, 2012), in this way, the FGTS will be
modelled as a minimum investment restriction. The comparison will be by the
contrast of the current reality (with FGTS) with the hypothetical reality (without
FGTS).

Since this is an abstract effect analysis, the values used in the models will be
agreed in order to allow an easier viewing from the analytical point of view, in
this way, a value of 1000.00 has been chosen to be added with 80.00
referring to 8% of FGTS. Other assumptions adopted by this model are a
minimum subsistence value set at 400.00 and the voluntary investment
starting at 0.00 when the remuneration offer is 0%.

3.2. Limitations of this analysis

The values 1000.00 and 400.00 are arbitrary and have nothing to do with the
financial reality or the expectation of minimum consumption in the Brazilian
society. It is well known that even without financial remuneration (0%), some
households tend to save for the future; however, this model will leave aside
this type of investment and will work only on the investment motivated by the
remuneration. Considering that the model with real values would imply the
same graph result (displacement of the future output level), this arbitration will
not alter the focus of this demonstration.

It is important to point out that this analysis is limited to demonstrating, with

economic rationale, the impact of the decrease in the supply of money in the
financial market and the effect of this decrease in the level of investment of
the firms. It is known that in practical reality the end of the FGTS would entail
countless indirect effects that would range from those previously evaluated

Estimating the end of FGTS on Brazilian output. 12

(literature review) to some impossible to predict. In this sense, it is worth
paraphrasing Hayek (cited in TOU, 2014) who humbly admitted to be the
economy of reality to be so complex that no mathematical or computational
model has ever been able to represent it perfectly.

3.3. The propensity to invest

The following table contains a collection of numerically created data. The
objective of the algorithm was to find a marginal propensity of investment that
reached the minimum subsistence value (maximum investment limit = 400.00)
with the interest rate at 11%. For the current reality the index found was 0.08
and for the hypothetical reality the index found was 0.086414.

Current reality: The total salary of the worker is 1080.00, but he has direct
access to 1000.00. The worker starts investing by own decision 0.00 when the
market offers remuneration of 0%, however, by participating in a compulsory
savings scheme, the financial market receives its investment of 80.00
regardless of the interest rate offered.

Hypothetical Reality: The worker has control over 1080, of which he starts
by investing 0 when the interest rate is 0%. As he does not participate in a
compulsory savings scheme, the financial market also starts with the offer of
0,00 when it offers remuneration of 0%.

Estimating the end of FGTS on Brazilian output. 13

By plotting the chart data, we can analyse the amount of money available in
the economy in function of the interest rate offered. Both curves meet at 11%
as this is the decided value as the ceiling cap for investment feasibility.

In the figure above, the blue curve represents the hypothetical reality (without
the compulsory deposit of the FGTS) and red curve represents the current
reality. By the position of the curves in relation to the 'y' axis, it can be seen
that the end of the FGTS tends to reduce the amount of money available in
the financial market as a function of the interest rate in any range agreed for
study, thus acting as a disincentive to investment, As Milne explains, An
increase in the () interest rate makes it more expensive to borrow so that
firms will end up borrowing and investing less () so there is a negative
relationship between the interest rate and investment. (2012, p. 176).

In addition to estimating the amount of money offered in the financial market,

this model allows us to derive the formula of the marginal propensity to invest
in function of the interest offered, which will be the first derivative of the
generative formula of the curve in question. The angular coefficient of the
formula represents the interest rate accumulated in the interval studied (0% to

Estimating the end of FGTS on Brazilian output. 14

12%), so, its modules will be used later to create the maps for the two realities
studied.

3.4. Using standard diagrams

The intertemporal production function relates in its axes x,y the current
savings with the forecast of future output. The curves of the model are the
production function that presents a decreasing return to investment, and the
iso-profit map, whose angle is determined by the market interest rate. The
model starts from the premise that firms will invest in production with the
expectation that future output has more present value than the amount
invested now. Figure 02 was taken from Milne (2012, p. 175). Its explanation
is brought as it is in the work cited:
The firm maximizes profits at point D (where the firms marginal return on
investment equals its marginal cost) on the iso-profit line CD where it chooses
the combination of borrowing and output that maximises profit: K0* and Q1*. At

point D, the iso-profit line is tangential to the production function (MILNE, 2012,
p. 175)

Estimating the end of FGTS on Brazilian output. 15

The Intertemporal production function is used at the microeconomic level, in
this way, the iso-profit map is drawn from the rate of interest given by the
market, since we take as premise that one firm or household is small enough
to do not change the current balance of the market. (Price-taker).

To relate the function to the previous study, the data in table 2 will be used as
representative of the realities together with a production possibility frontier
with diminishing marginal return to investment, in this way, the iso-profit map
of the current reality will be drawn for an interest rate of 4.47% and the
hypothetical reality map will be drawn for an interest rate of 5.48%. It is
important to emphasize that the previous numerical model is not intended to
define the financial equilibrium of the market. To make it possible to visualize
on the graph, a magnification of 3x was used on both angles.

The next chart combines the points in the previous graphs and demonstrates
the tendency of reduction on investment when moving from the current reality
to the hypothetical reality.

Estimating the end of FGTS on Brazilian output. 16

With the current reality rate, we will have a equilibrium at point E, where the
production possibility frontier is tangent to the current reality iso-profit map,
but if the interest rate is imposed by the hypothetical reality, there will be a
shift of equilibrium to the Point E', where the possibility frontier of production
is tangent with the iso-profit map of hypothetical reality. The vertical part of the
graph demonstrates the expectation of decreasing output for this reality
change, in the graph, represented by a shift from point O to point O'.

3.5. Aggregate analysis

The previous model demonstrated the displacement of output, taking into
account an increase in the interest rate resulted from lowering the supply of
money in the market, however, the interest rates used in the model were
exogenous, brought from a simulation that created a representative value
through the idea of the efficiency of the increase of the rate of interest in the
conquest of the investment. This next model places the intertemporal
production possibility frontier and the aggregate indifference map on the same
graph. The interest rate is defined within the model from the point where the

Estimating the end of FGTS on Brazilian output. 17

intertemporal production possibility frontier is tangent with the aggregate
indifference map. To combine these curves in the same study, it is necessary
to mirror the previous graph horizontally. The horizontal axis changes from
measuring the increase in investment to measuring the increase in
consumption. This mirroring, brought by Milne (2012) is demonstrated in the
figures below.

The next chart shows the expectations of the households (savings) and firms
(investments). The equilibrium point is where the production possibility frontier
is tangent with the aggregate indifference map. The interest rate is
endogenous and is represented by the lines P and P, whose angles are
defined by - (1 + r) where r is the equilibrium market interest rate.

Estimating the end of FGTS on Brazilian output. 18

Analysing the two realities again, we can observe that the FGTS modifies the
time preference for consumption, so that its existence imposes on the
consumer a behaviour in the sense of consuming less now, and likewise
consuming more in the future. Changing this behaviour causes a clockwise
rotation in the indifference curve, as Milne (2012, p. 182) explains. This is like
a shift in preferences away from future consumption and towards current
consumption, so this can be thought of as a steepening (or clockwise rotation)
of the indifference curves.

Observing this phenomenon in the graph of figure 7, we notice that the

clockwise rotation shifts the equilibrium from point E to point E', which is
caused by the reduction of the investment observed by the displacement of
points C to C', resulting in a decrease of future output from point O to O'. Also
in the same model it is possible to notice that the new equilibrium point
modifies the slope of the tangent line from -(1 + r) to -(1 + r'), from where it is
possible to conclude that there was an increase in the interest rate practiced
in the market.

4. Conclusions
This work estimated, using economic theories learned in module DD309, the
possible effects of the end of the compulsory deposit FGTS in the Brazilian
financial equilibrium. First, a comparison was made between the theories that
support the end of the FGTS against theories that support the continuity of the
fund. The literature review was constructed in order to list the scientific
theories relating to the theme. The argument against the FGTS, mostly
stemming from works grounded on the neoclassical approach, justifies that
the relaxation of the compulsory deposit and the end of labour laws would
increase job creation. The opposite argument has shown that the FGTS is not
only a compulsory deposit but also a social reality rooted in Brazilian culture.
In addition to contributing as a macroeconomic stabiliser, the FGTS provides
a time of financial coverage to the unemployed worker, removing this
responsibility from the taxpayers.

Estimating the end of FGTS on Brazilian output. 19

In order to demonstrate the inconsistency of the lobby that encourages the
transfer of the value paid as FGTS directly to the worker, the theory of the
money equilibrium value and the information asymmetry in the client-agency
model were brought. Phenomena such as the neutralisation of that fictitious
wage increase through inflation, as well as the risk of the loss of the stabilising
effect where explained. The widespread empirical view that the market offers
better investment opportunities has been commented on with reference to the
cost-benefit-trade-off theory, emphasising the FGTS as a risk-free investment.

The argument about corruption and the state's inability to adequately address
public interests is not refuted by this work, but attention is drawn to the
importance of working to evolve anti-corruption measures. Since the end of
programs such as the FGTS would mainly impact the most vulnerable
population, it was sought to focus on solutions, leaving aside demagogues
and unproductive moralism.

Finally, we set out to the application of economic models to predict and

demonstrate graphically how that change would impact on future output. The
first experiment created a hypothetical investment pattern for the two realities
studied. Through the result obtained, it was possible to demonstrate
graphically that the existence of a compulsory deposit tends to offer more
money in the financial market. The next analysis demonstrated that a higher
interest rate in the present tends to lower future output.

The last graph was an aggregate study in which the interest rate is
endogenous and dependent on the equilibrium condition. By combining the
intertemporal production possibility frontier and the aggregate indifference
map, it was possible to demonstrate that by reducing the money offered in the
financial market, the FGTS would cause a clockwise shift in the aggregate
indifference map that simultaneously modifies the expected future output and
the Interest rates.

Estimating the end of FGTS on Brazilian output. 20

5. Appendix 1 CLT - The Brazilian Employment Law

In order to understand the FGTS, its legal predictions and particularities, it is

important to make a brief explanation of Brazilian labour laws since its
protective characteristics is not a rule in the United Kingdom.

The set of Brazilian labour laws, entitled "Consolidation of Labour Laws",

follows the legal principles of protection and non-negotiability. This model of
legal institute differs from liberal codes in the sense that it restricts the parties'
freedom to negotiate contractual clauses. According to the principle of
inalienability of rights, even if the employee signs a document giving up a
certain legal provision, this document will be void, in this way, even if he want,
the employee is not allowed to abdicate his vacation, his 13th salary6, his
FGTS, Among other legal rights. In line with the protection intentions, the
labour court, dispensing the need for a solicitor or prepayment of court costs,
will always receive a claim for noncompliance with the CLT.

________________
6 - The end-of-year bonus culture was absorbed by the Brazilian legal system and
transformed into an inalienable right, in this way; the Brazilian worker under the CLT is
entitled in December to an additional payment equivalent to his monthly salary. Although the
demand for typical end-of-year products increases, this benefit, being punctual, is not
significant to inflate the basic products. Like the FGTS, this benefit is criticized by the liberal
th
lobby, which asks for diluting the 13 salary in monthly instalments. If the 13th salary were
diluted in monthly payments, the greater demand on the products of the basic basket would
neutralize through inflation this wage increase, so that the 13th salary would cease to exist in
practical terms.

Estimating the end of FGTS on Brazilian output. 21

6. Appendix 2 - What is FGTS?

The FGTS is a fund formed from the compulsory deposit that the employer
must make on behalf of the employee. Slightly similar to today's growing
pension schemes in the UK, the FGTS differs in its form of collection, flexibility
and also in the conditions of withdrawal. The FGTS does not allow the parties
to choose the bank that is the recipient of the fund, as well as the amount,
which is currently set at 8% of the worker's income.

As a rule, the employee will have access to all accumulated deposits

(monetarily corrected) at the time of retirement, however, the FGTS scheme
allows withdrawal also at special moments, such as involuntary
unemployment, some health conditions, home ownership, among others.

In the employment relationship, the FGTS serves as an index of the fine for
end of working contract. In the event of unjustified dismissal or a reasoned
dismissal request, the employer must deposit to the worker 40% of the total
amount accumulated during that employment contract, in addition to 10% to
be deposited in the common fund. The purpose of this legal provision is, in
addition to discouraging an avalanche of waivers in times of economic crisis,
to provide the employee with a kind of "additional unemployment insurance"7
during the period in which he seeks new employment.

_______________
7 - In Brazil there is now the unemployment insurance plan that is financed by the FAT - Fund
for Workers' Assistance - and has the number of parcels and ceiling amount limited by law, in
this sense, I use the term "Additional Unemployment Insurance" and I call attention to the fact
that, on this "additional unemployment insurance", indexed by the contractual penalty, there is
no contractual ceiling, so its macroeconomic effects are much more significant in order to
maintain, for a limited period of time, the economic activity of the unemployed.

Estimating the end of FGTS on Brazilian output. 22

7. Appendix 3 - Why is the end of the FGTS considered?

Despite integrating the operational costs of the employer, the FGTS is

compulsorily deposited in a public bank and for investment on a specific
industry, in this way, this value integrates the employee's salary but is not
subject to the mechanisms of adjustment of prices and does not influence the
inflation of basic products. This peculiarity removes from the labour market
the power of indirect control over the total value of labour.

It is in the banking sector, however, that there is the clearest conflict of

interest: FGTS money is made available in the market through public banks at
lower interest rates than commercial banks, thus acting as a major competitor
of private banks.

The social perception about the need for the FGTS, as well as the work of the
press and liberal think tanks8 has increasingly given way to the federal
government to create legislative alternatives to end the FGTS. The same
country where an average of 290 children died of hunger a day (Globo, 1992)
experienced a giant economic growth and, thus, the political lobby of banks
and large companies no longer suffers significant popular repression.

At the time of this writing, the parliament had already approved ways of hiring
workers outside the CLT. Unrestricted outsourcing of workers, formerly
prohibited in Brazil, was definitely regulated allowing not only the birth of
employment agencies, but also the hiring of workers behind their own
individual companies. This method, in Brazil called "PJotization culture,
allows the employer to choose whether to hire the worker within the CLT
regime, in which the FGTS is an inalienable clause, or if the worker is required
to present himself as a service provider, excluding any protection offered by
CLT.

______________
8 - Although it is a regulated profession restricted to bachelors in Economic Sciences, the use
of the title "Economist" as well as the journalistic writing of subjects related to Economics
closed the doors to the professionals and, committed to the diffusion of liberal ideologies, the
press presents as true any theory created by Facebook Economists. For part of the Brazilian
youth, the economic methods presented by youngsters graduated by the video lessons of
Misis Institute Brazil are more credible than what say renowned economists with decades of
experience in central banks, economic policy ministries, research centres and the like. It can
be said that all the economic knowledge developed by humanity is now ridiculed in the
empirical environment by the phrase "less Marx, more Misis".

Estimating the end of FGTS on Brazilian output. 23

8. Appendix 4 Dweck and Haddad

In addition to the literature review on the subject, the opinions of Ester Dweck
and Fernando Haddad were brought because they were academics with vast
experience in public administration. The interviews were conducted in the
month of closing of this work and aim was to bring a more current point of
view about the theme. The public curricula of the interviewees are show
bellow.
Ester Dweck (from her lattes-cv)
"She holds a degree in Economics from the Federal University of Rio de Janeiro
(1998) and a doctorate in Economics of Industry and Technology from the
Federal University of Rio de Janeiro (2006), with a" Sanduche Doctorate "at the
LEM of Scuola Sant'Anna, in Pisa, Italy. She is an Adjunct Professor at the
Institute of Economics at UFRJ. She has experience in economics, with
emphasis on public sector economics, growth and economic development,
working mainly on the following topics: Fiscal regime and state participation,
demand-led growth, micro-macro integration, balance of payments constraints,
analysis Of input-output and simulation models. Between June 2011 and March
2016, she worked in the Ministry of Planning, Budget and Management, in the
position of Chief of the Economic Advisory and as Secretary of Federal Budget.
And between March 2016 and May 2016, she held the position of Deputy Chief
of Analysis and Follow-up of Government Policies of the Civil House of the
Presidency of the Republic. " (CNPQ, 2017)

Fernando Haddad (from wikipedia)

Haddad holds a master's degree in economics and a doctorate in philosophy
[4]
from the University of So Paulo. He has devoted much of his career to public
service: he has been a consultant for the Fundao Instituto de Pesquisas
Econmicas an economics research institute based at the School of
[5]
Economics, Business and Accounting of the University of So Paulo, chief of
staff to the Finance and Economic Development Secretary of the municipality of
[5]
So Paulo, and a special advisor to the Ministry of Planning, Budget and
[5]
Management. He is also a professor in the politics department of the University
[6]
of So Paulo. Haddad took over the cabinet position of Minister of Education
on 29 July 2005, when his predecessor, Tarso Genro, left the position to become
[5]
the chairman of the Workers' Party. On 2012, Haddad was a candidate for

Estimating the end of FGTS on Brazilian output. 24

 mayor of So Paulo during the 2012 Brazilian municipal elections. After
[7]
successfully advancing to the second round, he faced former mayor Jos Serra
[8]
(who was the most voted candidate in the first round) and won it with 55.57%
[2]
of the valid votes. In June 2013, his administration faced big demonstrations,
when So Paulo city hall and the government of the state of So Paulo (which
runs the train and metro system of So Paulo) announced the raising of tickets
[9]
prices from R$3,00 to R$3,20. The demonstrations, known as the 2013
protests in Brazil, were the biggest protest movement since those in 1992
against the Brazilian President in power at the time, Fernando Collor de Mello.
On October 2, 2016, Haddad lost his bid for re-election to Brazilian Social
Democracy Party candidate and media mogul Joo Doria Jnior, taking in only
[10]
17% of the vote. He left office on January 1, 2017. (WIKIPEDIA, 2017)

9. Appendix-5: "my mansion my life"

After the coup in Brazil in course at the time of this writing, the programs to
encourage home ownership were suspended for low-income workers. The
new line of credit, called by critics of the government for "my mansion my life"
is aimed at high-income social groups. It should be noted that, despite the
distortion caused by the democratic disruption on Brazilian politics, the
purpose of the fund has always been to encourage home ownership by low-
income families.

10. Appendix-6: Printing money for inflation

It is undeniable that the excessive issuance of currency for the payment of
debts forces the imbalance of money reducing its value. It is not a question of
defending such a practice, but rather of agreeing that it is "of evils, the least."
Having invested in a private bank that would be bankrupt as a result of a
financial crisis, the investor would be left with the hope of receiving an
insignificant fraction of his investment as a share of the expropriation of the
remaining assets. By investing in a fund guaranteed by the central bank, even
victim of the inflationary effects arising from the exaggerated emission of
money, the investor would receive his investment.

Estimating the end of FGTS on Brazilian output. 25

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