FOR OFFICIAL USE ONLY

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A Report No. P 7275 BR PROPOSED FISCAL AND ADMINISTRATIVE REFORM SPECIAL SECTOR ADJUSTMENT LOAN IN THE AMOUNT OF $ MILLION TO THE FEDERATIVE REPUBLIC OF BRAZIL March 7, 2000 Poverty Reduction and Economic Management Brazil Country Managing Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization

2 CURRENCY UNIT - Real (Rs.$) US$1 = Rs.$1.77 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 Abbreviations and Acronyms ANATEL National Telecommunications (Agencia Nacional de Telecomunica,oes) ANEEL National Electric Energy Agency (Agencia Nacional de Energia Electrica) BCB Central Bank of Brazil (Banco Central do Brasil BIS Bank of International Settlements BNDES National Development Bank (Banco Nacional de Desenvolvimento Econ6mico e Social) CAS Country Assistance Strategy CEF Federal Housing Bank (Caixa Economica Federal) CLT Private Sector Labor Regime (Consolida,do das Leis TrabaIhistas) COFINS Financing Contribution for Social Security (Contribu,ao para o Financiamento da Seguridade Social) CPMF Financial Transactions Tax (Contribu,ao Provisoria de Movimenta,ao Financeira) GDP Gross Domestic Product IBGE Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatistica) ICMS Value Added Tax (Imposto de Circula,do de Mercaderias e Servi,os) IDB Interamerican Development Bank IFI International Financial Institution IGP-DI General Price Index - Domestic Supply (Indice Geral de Pre,os - Disponibilidade Interna) IMF International Monetary Fund IOF Financial Operations Tax (Imposto de Operacoes Financeiras) MF Ministry of Finance (Ministerio da Fazenda) PME Monthly Employment Survey (Pesquisa Mensal de Emprego) PNAD National Household Survey (Pesquisa Nacional por Amostra de Domicilios) RGPS General Social security Regime (Regime Geral de Previdencia Social) RJU Civil Service Employment Regime (Regime Juridico Unico) SARE State Secretariat of Administration and Patrimony (Secretaria de Estado da Administra,do de Administra,do e do Patrim6nio) SOE State-owned Enterprises S/SECAL Special Sector Adjustment Loan STF Supreme Federal Tribunal (Supremo Tribunal Federal) Vice President: Director: Lead Economist: Task Manager: David de Ferranti Gobind T. Nankani Suman Bery Mauricio Carrizosa

3 FOR OFFICLIL USE ONLY States of Brazil AC Acre PB Paraiba AP Amapa PE Pernambuco AL Alagoas PI Piaui AM Amazonas PR Parana BA Bahia RJ Rio de Janeiro CE Ceara RN Rio Grande do Norte DF Distrito Federal RO Rondonia ES Espirito Santo RS Rio Grande do Sul GO Goias RR Roraima MA Maranhao SC Santa Catarina MG Minas Gerais SE Sergipe MT Mato Grosso SP Sao Paulo MS Mato Grosso do Sul TO Tocantins PA Para Tlis document has a restricted distribution and may be used by recipients only in the performance of their official dufies. Its contents may not othierwise be disclosed without W'orld Bank authorization.

4

5 BRAZIL ADMINISTRATIVE AND FISCAL REFORM LOAN Loan and Program Summary Borrower: Implementing Agencies: Poverty Category: Amnount: Terms: Commitment Fee: Front-end Fee: Diescription: Federative Republic of Brazil Ministry of Finance and Ministry of Administration Not Applicable US$ Million (including financing of the front-end fee) Five-year term loan, with three-year grace period, a floating interest rate equal to 6-month US$ LIBOR plus 400 basis points percent on undisbursed loan balances, beginning to accrue 60 days after signing. 1 percent of the loan amount, to be financed under the loan. The operation would support the Government's program to improve Brazil's fiscal performance in general and the fiscal performance of the states in particular, with an emphasis on administrative reform to reduce personnel costs and increase efficiency. The Program consists of policy actions to improve fiscal performance chiefly through reducing the burden of the wage bill in the federal, state, and municipal governments, as well as in the Federal District. The actions include introduction and initiation of the Government's Fiscal Stability Plan, approval and implementation of laws regulating the 1 9 tl Amendment to the Constitution (the Administrative Reform), refinancing of the state's debts, and establishment of a facility support states undertaking administrative reform. Benefits and Risks: The main indicators of success include an increase in the overall public sector balance, a reduction in net public sector debt, an increase in primary balances and a reduction in debt/revenue ratios at the state level, and a reduction in the level of the personnel expenditures/revenue ratio at the state levels. Related benefits include reduced real interest rates and higher growth resulting from improved fiscal performance, and efficiency gains from reallocating human

6 resources from the public sector to productive activities in the private sector, from increased beneficiary participation in public sector service delivery, from undertaking performance evaluations of the civil service, and from adopting a managerial approach in public sector administration. A first risk is that public sector balance and debt targets may not be fully attained due to various reasons, including higher interest rates on the public debt and successful domestic pressures for additional expenditures. This risk is mitigated by the expectation, based on the Government's policy performance record, that any possible deviation from attaining public sector balance and debt targets is likely to trigger additional actions by the Government. Second, there is the risk that recession prevents a smooth transition of dismissed public employees to private employment, generating some social costs. This risk is mitigated by ongoing economic recovery, expected indemnities to dismissed workers, and limited likelihood of dismissal of distressed employees. Third, there is the risk that debt agreements with the states weaken due to political pressure from sub-national governments. This is mitigated by the Government's strong commitment and need to enforce the principle that states must pay their debts to ensure fiscal sustainability. Financing Plan: Net Present Value: Not Applicable Not Applicable Project Identification Number: BR-PE-P This report is based on the findings of Bank missions headed by Mauricio Carrizosa (task manager, LCSPR) that visited Brasilia and several states during the period Inputs to the report were provided by Indermit Gill (LCSHD); Joachim von Amsberg (LCC5C); Alberto Chong (DECRG); Francisco Cameiro (consultant), Francisco Pereira (consultant), and Anne Pillay.

7 FEDERATIVE REPUBLIC OF BRAZIL PROPOSED FISCAL AND ADMINISTRATIVE REFORM SPECIAL SECTORAL ADJUSTMENT LOAN Table of Contents 1. RECENT ECONOMIC DEVELOPMENTS 1 MACROECONOMIC PERFORMANCE AND POLICIES 1 POVERTY REDUCTION 2 2. THE FISCAL AND ADMINISTRATIVE REFORM PROGRAM 5 FISCAL REFORM ISSUES 5 ADMINISTRATIVE REFORM ISSUES 7 THE REFORM AGENDA. 9 EXPECTED IMPACT OF THE REFORM PROGRAM 21 SUSTAINABILITY OF THE REFORMS THIE PROPOSED LOAN 30 BANK ASSISTANCE STRATEGY 30 PROGRAM OBJECTIVE 30 PROGRAM DESCRIPTION 31 DESCRIPTION OF FINANCIAL ASSISTANCE 32 PROGRAM IMPLEMENTATION AND SUPERVISION 34 DISBURSEMENT AND AUDITING 34 PROGRAM BENEFITS 35 LESSONS LEARNED 35 RISKS AND RISK MITIGATION PROVISIONS RECOMMENDATION ANNEXES 39 ANNEX 1: LETTER OF SECTOR DEVELOPMENT POLICY 40 ANNEX 2: ACTIONS PRIOR TO BOARD PRESENTATION 47 ANNEX 3: KEY ECONOMIC INDICATORS 49 ANNEX 4: KEY EXPOSURE INDICATORS 51 ANNEX 5: STATUS OF BANK GROUP OPERATIONS 52 ANNEX 6: STATEMENT OF IFC'S HELD AND DISBURSED PORTFOLIO 54 ANNEX 7: IFC: APPROVALS PENDING COMMITMENT 57 ANNEX 8: BRAZIL AT A GLANCE 58

8

9 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SPECIAL SECTOR ADJUSTMENT LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR BRAZIL'S FISCAL AND ADMINISTRATIVE REFORM PROGRAM 1. This report proposes a special sector adjustment operation, in the amount of US$ million (including front-end fee), to support a Fiscal and Administrative Reform Program in Brazil. This is the first of an expected program of two adjustment operations in support of Brazil's fiscal and administrative reforms. The operations are part of a proposed Bank package of adjustment loans totaling $2.5 billion that also supports reform in the areas of social security and social protection expenditures. The first loans in the latter two areas were approved in January The Bank package is an integral part of a broader support initiative by the IFIs, including the IMF and the IDB, together with selected bilateral governments, directly and through the BIS to help Brazil meet its external financing requirements in support of key structural and social reforms. 2. The objective of the Program is to improve Brazil's fiscal performance in general and the fiscal performance of the states in particular, with an emphasis on administrative reform to reduce personnel costs and increase their efficiency. The first loan supports measures and actions that have already enacted and are being implemented, including Brazil's Fiscal Stability Program, the State Debt Refinancing Law, the State Debt refinancing agreements, the Sub-national Public Indebtedness Regime, and Administrative Reform. The expected outcomes from these measures and actions include an increase in the overall public sector fiscal balance and a reduction in the ratio of public sector net debt to GDP; an increase in the aggregate fiscal surplus at the state level; a reduction in the ratio of personnel expenditures to net current revenues at all levels; a reduction in the ratio of state debt to net state revenues; and additional privatization at the state level. The second loan would support additional measures to be enacted, including Brazil's new fiscal code (the Fiscal Responsibility Law) and a pending bill that will complete the regulation of Administrative Reform. 1. RECENT ECONOMIC DEVELOPMENTS MACROECONOMIC PERFORMANCE AND POLICIES 3. Since the early 1990s, Brazil has been engaged in a major reform of its economy, moving away from import substitution and state-owned enterprises towards greater emphasis on private initiative, competition and international integration. Considerable progress has been made in controlling inflation and creating an improve economic environment for private enterprise, fiscal adjustment and reform of the public sector. From 1992 to 1997 Brazil experienced a very successful growth performance. Annual growth averaged 4.2%, a major improvement over the average for the previous five-year period (0.0%). Factors contributing to this positive outcome include a trade liberalization

10 2 during the early 1 990s and a well-designed and implemented economic stabilization program initiated in mid (the Real Plan), together with a favorable international economic environment. By contrast, the last two and a half years (mid to end- 1999) have seen a much more volatile international economic environment with a series of crises in international markets. These crises adversely affected growth in Latin America and Brazil was no exception. The average rate of growth during was only 0.3%, but by the end of 1999, recovery of industrial output was firmly established. 4. As a result of the stabilization plan introduced in 1994, annual inflation declined from over 2000% in 1993 to less than 2% in Even the large currency depreciation of January 1999 had a fairly limited small pass-through impact on inflation. Inflation in 1999 was contained to about 20% on broad price indices and 8% on consumer price indices. This was the result of sluggish aggregate demand and continued monetary tight ness. Following the change in the exchange rate regime in 1999, from a crawling band to a floating rate, Brazil introduced a sophisticated inflation targeting framework. Targets were set at 8%, 6% and 4% respectively for , with a margin on each side of two percentage points. With an improved fiscal framework (see para. 14 ) and assuming an absence of external shocks, the inflation targets for are realistic. The inflation targets provide the anchor for monetary policy. 5. Policy performance has also improved substantially. As early as 1995, the Government attempted to address the structural fiscal deficit unmasked by price stability. However, lack of legislative consensus meant that fiscal adjustment lagged behind other parts of the economic reform program. As a result, Brazil has been dependent on large capital inflows. This dependence coupled with the prevailing exchange rate regime implied vulnerability to sentiments in international markets. The Government responded competently and effectively to the loss of market confidence in late and early with a combination of tightened monetary policy and fast-acting fiscal adjustment measures coupled with a new drive for structural fiscal reforms. Throughout 1999, fiscal adjustment has been carried out with tremendous effort and remarkable discipline and has achieved the ambitious targets that were set. These measures, taken together with the shift to a floating exchange rate in January 1999 have been successful in preserving economic stability and regaining market confidence. Provided the external environment remains benign, Brazil can look forward to a return to steady, non-inflationary growth. Brazil's remaining economic vulnerability results from its continuing, though declining, fiscal and current account deficits. As fiscal deficits are closely correlated with current account deficits, fiscal adjustment at both national and sub-national levels are critical for reducing vulnerability and restoring growth. POVERTY REDUCTION 6. Following a period of increasing poverty from , the Real Plan significantly reduced poverty levels during the period The national headcount ratio (using a poverty line of R$65 per capita per month at 1996 prices) declined from

11 3 34% in 1993 to 22% in This beneficial effect was due to: (i) economic growth and rising real wages; (ii) the end of inflation (salary erosion and inflation tax); (iii) a significant appreciation of the local currency shifting relative prices toward the service sectors in which most poor work; and (iv) a significant increase in the minimum wage to which important income sources, such as pensions, are tied. Despite these advances, Brazil continues to be a country with high income inequality and a high level of poverty for its level of per-capita income. The average 1998 headcount ratio of 21.7% masks important regional differences, with regional headcount ratios ranging from 8.5% in the South East to 47.3 in the North-East. 7. The succession of economic crises since 1997 has affected the poor mainly through reduced labor demand and the resulting reduction in employment and/or real wages. Nevertheless, since economic performance in 1999 has been much better than feared at the time of the devaluation in early 1999, the negative poverty impact of the crisis has also been much less severe than expected. According to available measurements of labor incomes 2, the headcount poverty rate in six metropolitan areas dropped from a peak of 35.3% in July 1994 to a low of 24.6% in October The rate increased continuously from November 1997 until March 1999, when it reached 30.0%. The latest data through September 1999 shows a slight improvement in poverty rates indicating a reversal in the negative crisis impact. Country-wide indicators show a trend of slowly reducing labor income inequality continuing through The rate of open unemployment reached a high of 8.2% in March 1999 but since then has declined again to 6.3% (December 1999). 8. Government support for the poor during the difficult period has been increasingly effective. Supported by the Bank's Social Protection S/SECAL and a parallel operation by the IDB, the Federal Government has effectively protected the expenditures for a core set of 22 selected priority social programs in the areas of education, health, labor, and social assistance, considered to be particularly effective in reaching the poor. Despite the drastic overall cuts in the 1999 budget, allocations for these programs (totaling about R$12 billion) were protected near or above their 1998 levels. Total actual spending for these protected programs in 1999 has slighly exceeded the Government commitments. The Government's budget proposal for 2000 implies an increase in funding for the total of the 22 programs of 20% over the 1999 budget proposal and 12% over the approved 1999 budget, including very significant increases for relatively new and promising programs that link transfer payments to poor families to children's school attendance (Child Labor Eradication Program, and Bolsa Escola). Subnational Governments have also contributed to social protection in the crisis period, for example through workfare programs implemented by several states and municipalities. At the same time, the Federal Government is proceeding with a program to improve the quality and targeting of spending in the social area. The remaining second and third tranches of 1 Poverty data here come from a forthcoming urban poverty report based on the 1998 PNAD household survey and a food-only poverty line. 2 Data from the Monthly Employment Survey, PME, undertaken by IBGE. This survey most likely exaggerates the negative impact of the crisis since it is limited to six metropolitan areas (most likely the hardest hit areas) and excludes income from transfer programs which would have compensated for some of the loss of labor income.

12 4 the IDB's Social Protection Loan are linked to physical performance indicators of the protected programs and a program of studies and steps to improve targeting and quality of these programs. In addition, the Bank would follow with particular interest the strengthening of the implementation framework (monitoring and evaluation, technical assistance, training, and capacity building for participating municipalities, etc.) for the transfer programs linked to school attendance discussed above. 9. Increased public and political attention toward poverty problems, together with policy reforms undertaken in recent years, strongly suggest an improved outlook for Brazil's poor. The remarkable rise of poverty reduction into the top of Brazil's agenda of public debate (over the last year in particular), is reflected in congressional initiative to formulate concrete proposals for additional poverty reduction efforts and by a proposal to create a new Poverty Alleviation Fund that has the Government's support and is currently being debated in Congress. Structural reforms of the economy have laid the groundwork for economic stability that would protect the poor from income fluctuations related to failed stabilization attempts. The impact of renewed growth on poverty reduction, though gradual, will be important. The major drive for improved education access and quality is still recent but will yield significant poverty reduction results in the medium term. The impact of other structural social policies including land reform, urban upgrading, professional training, labor market reforms, and others, is difficult to quantify but qualitatively important and expected to continue, including the social assistance component of Social Security (which is protected under the Social Security Reform being supported by the Bank). The poverty reducing impact of transfer programs has been large in recent years and is also expected to continue, especially if measures for better targeting are successfully implemented. The Government's stated goal is to reduce the poverty rate by 50% by the year This target could be accomplished with annual average growth of 3.5%, with the joint effect of other structural social policies and improved social protection, and if recent improvements in outcomes from educational policies continue. 3 3A detailed discussion is provided in the CAS.

13 5 2. THE FISCAL AND ADMINISTRATIVE REFORM PROGRAM 10. The proposed operation has been designed to support improvements the fiscal performance of Brazil's public sector. Improved fiscal performance is closely linked to administrative reform: increased efficiency in the delivery of public sector services is regarded as one of the key components of fiscal adjustment. This is particularly so with regard to most sub-national administrations, where personnel costs (wages and retirement/survivorship benefits) have become unduly high with respect to revenues. An adjustment of these costs through administrative and social security reforms is a requirement for improving Brazil's sub-national and overall fiscal performance. The proposed loan supports policies for federalfiscal adjustment as well as federal policy incentives for sub-nationalfiscal adjustment, particularly through administrative reform. FISCAL REFORM ISSUES 11. Fiscal Imbalance. At present, fiscal adjustment is Brazil's most challenging macroeconomic policy issue. Brazil's public sector borrowing requirement in 1998, which amounted to 8 percent of GDP, increased the debt/gdp ratio from 34.4 to about 42 percent of GDP (Chart 1). The inadequate fiscal performance contributed to the considerable amount of turbulence that Brazil's financial and foreign exchange markets suffered in the aftermath of the Asia crisis in October Faltering confidence in the crawling exchange rate band coupled with policy-led declines in interest rates (from 43.3% in November 1997 to 19.2% in August 1998, prior to the Russia crisis 4 ) led to a decline in liquid international reserves from the exceptional peak of $73.8 billion attained in April to a more normal level of $40.3 billion in November of In late 1998, the Government introduced a Fiscal Stability Program, supported by the IMF. Reserve losses led to a change in the exchange rate system in January 1999, from the crawling exchange rate band introduced at the onset of the Real plan to a floating rate. The resulting 64% devaluation (from R$1.21 to R1.98 to the dollar) raised the debt/gdp ratio to about 52% in January 1999, reflecting the dollar-denominated and dollar-indexed federal debt (which comprised about 28% of total debt in late 1998). Furthermore, the Government raised interest rates again to defend the currency, to 45% by February 1999, making fiscal adjustment even more difficult and discouraging growth. The January 1999 devaluation occurred as confidence faltered in the aftermath of a debt moratorium declared by one of the major states in Brazil, underscoring the fragile state of sub-national finances in Brazil. Conditions improved following the announcement of a revised agreement with the IMF that introduced a stronger fiscal adjustment program. Since January 1999, the exchange rate has ranged from about 1.7 to 2.1 (the rate at the end of February 2000 was 1.77), overnight rates have returned to a level below 20 percent p.a., net public debt had declined to 47% of GDP by end-99, and GDP growth in 1999 was about 0.8%, much better than the -4.0 percent predicted at the beginning of the year. In November, 1999 the IMF Board approved the fourth review under the Stand-by arrangement. 4 Over-Selic Rate

14 6 12. Incentives on Expenditures. Much of the inadequate fiscal performance originated in excessive incentives for public expenditures, including un-funded constitutional mandates (e.g., universal access to health care) and decentralization of revenues (but not of responsibilities 5 ). On the expenditure side, the main structural problems have been: * expenditure rigidities: the limited scope for expenditure policy, as most expenditure is predetermined by constitutional or legal provisions, including constitutional transfers, constitutional social security benefits, health expenditures, and many others (it is estimated that the federal government has control over only 10 percent of its budget); * a lack offiscal balance targets: budgets are mainly driven by expenditure mandates and not by fiscal balance objectives; and * weak sub-national budget constraints: weakness of the budget constraints that have been faced by sub-national governments, leading to excessive expenditures at the subnational level. Some progress has been achieved in addressing expenditure rigidities, including a 20% reduction in earmarking and an increased ability to reduce excessive public employment The lack of fiscal balance targets is being achieved by the Government's Fiscal Stability Plan and, more systematically, by the new fiscal code that is presently being discussed by Congress, the Fiscal Responsibility Law. The Fiscal Responsibility Law will also strengthen budget constraints at all levels. Reforms to strengthen the sub-national budget constrain are discussed in the next section. The main structural reforns with a bearing on public expenditures, including the Fiscal Responsibility Law and Social Security Reforms are discussed in the next section. Chart 1- Brazil Net Debt1GDP: E 0.0h_ 30.0% * *l IL % 30.0% 10.0%/ O~~~~ - D C 3.. CD cd 02, > g X m288jd88ea8r u o PGoP oi lo 13. Sub-national Finances. Until 1998, states financed their excess expenditures through increasing debt levels. 6 As a result, many states have unduly high levels of debt in relation to their revenues. Their primary balances have been inadequate to contain 5 See Rigolon, Francisco and Giambiagi, Fabio, "A Renegocia9do das Dividas e o Regime Fiscal dos Estados", BNDES, Textos para Discuss&o, No. 69, 1999 (July). 6It is argued that sub-national govermments in Brazil have not faced a sufficiently hard budget constraint due to existing political incentives. An analysis of the impact of political incentives on sub-national fiscal disequilibrium is found in Mendes, Marcos Jose, "Incentivos Electorais e Desequilibrio Fiscal de Estados e Minicipios", Instituto Femand Braudel de Economia Mundial (1999).

15 7 those debt levels. As of September 1999, state gross debt/revenue ratios exceeded 2.0 for 12 of the 27 states and exceeded 1.0 for 21 of the 27 states. In 1999 (January- November) the primary surplus for the 27 states was 3.5% of net disposable current revenues. While this is an improvement over 1998, when states had a deficit of 6. 1% of their net disposable revenues, the present surplus is still insufficient to reduce the ratio of debt to revenues. With normal parameters (e.g., 6.6% real interest rate, 4% real growth in revenues, and a debt/revenue ratio of 2.2), the minimum primary balance required to reduce debt would be above 5.5% of current revenues. A larger real interest rate (brought about, for example, by indexation exceeding general inflation) or sluggish revenue growth would raise these requirements, as they did in The required surpluses will be higher than the likely 1999 surplus. To achieve higher surpluses, many states will need to deepen control of personnel costs, which are critical for successful adjustment. The major focus of the Program is on reversing the overallfiscal performance of the states by encouraging and assisting in their fiscal adjustment and in administrative reforms. 14. The Government's Approach to Fiscal Reform. The authorities regard fiscal reform as a central component of the Government's program, with a bearing on confidence, growth and public sector efficiency. In 1998, the Government introduced a Fiscal Stability Program to improve Brazil's fiscal performance (the primary balance), reduce public sector debt to more comfortable levels and reduce real interest rates. Lower public debt and interest rates will improve confidence and encourage growth. Under the Government's program, supported by the IMF, the specific aim is to bring down debt to 46.5% of GDP by the year 2001 through public sector primary surpluses exceeding 3% of GDP. In 1999, the programmed surplus of 3.1% was comfortably met. The authorities expect to continue obtaining the programmed surpluses chiefly through measures that have been enacted to raise federal taxes and to control federal expenditures and through debt refinancing agreements to encourage fiscal adjustment at the sub-national level. However, the Government has for long realized that, over the longer tern, sustained fiscal policy improvements require deeper structural changes in fiscal institutions, taxes, intergovernmental relationships, public administration, and social security. These changes will contribute to sustain fiscal adjustment and enhance public sector efficiency. They are part of the Government's far-reaching public sector reform agenda discussed further below. ADMINISTRATIVE REFORM ISSUES 15. Public Administration. Brazil's public sector administration and service delivery has been affected by a number of factors that can be summarized as follows: * Bureaucratic Public Administration: Brazil's public sector, as in many other countries, has suffered from a excessive reliance on procedures. The bureaucratic approach to public administration is being addressed through Administrative Reform, which places an increased focus on management and outcomes. * Public Enterprises: The bureaucratic approach to administration led to rigidities on public enterprises, which had to follow the same procedures adopted by the central

16 8 government (e.g., rules of government procurement were extended to public enterprises). The poor performance of public enterprises is being addressed through the Government's aggressive privatization program (para. 43). Mandatory tenure for civil servants. The 1988 Constitution made it mandatory for the public sector to hire with tenure. This has made it difficult for Governments at all levels to address labor redundancies and to adopt more effective managerial approaches. Administrative Reform has abolished mandatory tenure for the civil service (paras ). * Decentralization: Although decentralization is expected to have a positive effect on public sector efficiency and service delivery, the experience thus far in sectors such as health and education is mixed, with much progress still to be made. To fully reap the benefits of decentralization, administrative reform needs to reach the sub-national level. 16. Brazil's Approach to Administrative Reform. The Government's approach to administrative reform, as in several other parts of the world, is that the public sector should move from a bureaucratic state to a managerial state 7. This shift implies a rethinking of the role of the private sector and of public sector administrative and institutional approaches. The changes are based on a classification of state activities into four sectors: strategic core 8, which defines law and policies and ultimately ensures their enforcement; exclusive activities 9, which guarantee that laws and policies are followed and financed; excludable services'(, which are provided both by the public and private sectors; and production of goods by public commercial enterprises. Privatization of the later is viewed as a major action to achieve efficiency. Increased private sector involvement in excludable services is also seen as having a positive impact on efficiency and service delivery. Hence, Brazil has adopted privatization and other forms of private sector involvement as major policies with regard to these state activities. 17. The scope of privatization being limited to SOEs and, less so, to the so-called excludable service sector (e.g., health services), public sectors normally have an interest in direct management of a share of excludable services and dominate the strategic core and the exclusive activities'. It is particularly in regard to these services and activities that the proposed managerial approach entails an effort to have public administration focus more on the outputs or outcomes of the public sector and on its clients --the citizenry -- rather than exclusively on procedures. This requires a new administrative and institutional approach, largely inspired by public sector reforms that took place in Britain, New Zealand, Australia, and Sweden. Basic instruments to achieve it include 7This approach is well described by the views developed by former Administration Minister Luiz Carlos Bresser Pereira. See, Bresser Pereira, Luiz Carlos, "Managerial Public Administration: Strategy and Structure for a New State", in Journal of Keynesian Economics", Fall 1997, Vol. 20(1), pp a Includes parliament, the courts, the presidency, and ministers, as well as the corresponding local authorities in a federal system. 9 Includes the armed forces, the police, tax collection, regulatory agencies, and the agencies that finance and control social services, including social security. '0 Includes education, health, culture, and research. 1l One may note, nevertheless that the private sector has a limited role in these activities, including selfregulation and private protection.

17 9 decentralization, delegation of authority and responsibility (i.e., management contracts), and control of achievement of results. Even in the case of core services, where procedural characteristics remain important, a focus on service delivery is to be enhanced by stronger civil servants (i.e., competent and well-paid). In exclusive activities, decentralization, delegation, and monitoring become paramount. In excludable activities, autonomy, with civil society playing a role in their control, must be added. Brazil's Administrative Reform contemplates institutional instruments to enhance the focus of exclusive and excludable activities on management and outcomes. The reform will also encourages efficiency by permitting the dismissal of employees that perform inadequately. 18. Brazil's Administrative Reform also seeks to assist fiscal adjustment through containment of personnel expenditures. Brazil is today in a "cutback management" phase, where public spending cuts, including cuts in personnel spending, and improved efficiency are required to meet fiscal constraints in an economy where the tax burden already appears too high. The Administrative Reform serves this aim by allowing dismissal of civil servants when personnel expenditures are excessive. THE REFORM AGENDA. 19. Based on the approaches described above, the Government has developed and is implementing a Fiscal and Administrative Reform agenda that can be classified into the following key components: * Public Sector Fiscal Reform, as contained in the Government's Fiscal Stability Program and in Fundamental Structural Reforms with a Fiscal Impact; * State Fiscal Reform, as provided in the State Debt Refinancing Law and the State Debt Refinancing Agreements; - Administrative Reform, as established by a 1998 reform to civil service and institutional provisions in the Constitution and by the regulation of those provisions; * Privatization, as implemented through the National Privatization Plan. 20. Figure 1 links these reforms to expected outcomes. Public sector fiscal reform is expected to increase the overall primary balance of the public sector and reduce the burden of public sector debt. State Fiscal Reform is designed to encourage fiscal adjustment at the state level. Administrative Reform is expected to facilitate fiscal adjustment through reductions in personnel expenditures and to improve public sector efficiency. The following paragraphs discuss the reforms. 21. Public Sector Fiscal Adjustment Under the Government's Fiscal Stability Program, the planned surpluses for are 3.10%, 3.25%, and 3.35% of GDP. In 1999, the authorities exceeded the target by attaining a public sector surplus of 3.13% of GDP. To achieve the targets, the authorities are undertaking short term fiscal measures as well as implementing reforms to address structural sources of the fiscal deficit, including tax reform, the fiscal code, social security reform, and sub-national finance. As discussed before, the Government's objective is to reduce the public sector's debt/gdp ratio to

18 Figure 1: Relationship Between Policy Measures and Outcomes POLICY MEASURES OUTCOMES ~~~lb A v.4 lb ~~ 4~ ~

19 11 around 46.5% by the end of the year 2001, with the expectation that a sustainable stable or declining ratio will help Brazil withstand external shocks with less disruption of the domestic economy and that fiscal stability will help improve confidence, reduce real interest rates, and encourage growth. 22. Short Term Fiscal Measures. The short term fiscal measures that are being undertaken comprise actions to both reduce expenditures and raise revenues during The short terrn fiscal measures were announced first in October 1998, in the aftermath of the Russia crisis, and second, in March, in the aftermath of the chanre in the exchanpe rate system. Measures to increase revenues included increases in taxes and oil prices, collection of previously accrued taxes (including a vigorous defense against judicial challenges to some taxes). In 1999, these measures increased the tax/gdp ratio to 31% of GDP. Measures to contain expenditures cover lower wage adjustments, suspended hiring and promotions, and cuts in non-labor costs and investments. 23. Tax Reform. The authorities are also aiming at longer term measures to improve the level and quality of fiscal outcomes. Fiscal performance has been undermined both by the inefficiency of the tax system and by rigidities in the control of expenditures. The tax system relies on taxes that are clearly distortionary in that their non-neutral tax rates and cascading effects make for widely differential impacts across economic activities. Many of the cascading taxes at the federal level were enacted chiefly to help meet federal expenditure commitments. This required containing the amount of constitutional transfers to the sub-national governments, which would have occurred by raising, for example, the less distorsionary income tax. The Government is thus presently working with Congress on a tax reform that will seek to modify taxes and tax assignment to arrive at a simpler and more efficient tax system based on the income tax, a value added tax, and sales tax on key high-yield goods and services, with reduced cascading of taxes and reduced incentives for predatory tax competition among states. The tax reform will be complemented by a reform of the fiscal code discussed further below that aims at strengthening fiscal responsibility at all government levels. 24. The Fiscal Responsibility Bill. Moreover, Congress is presently considering a new fiscal code (Law of Fiscal Responsibility, already approved by Brazil's House of Deputies) that will seek to further strengthen fiscal discipline at the federal and subnational level, including the mandatory establishment of fiscal targets. The new proposed 12 The CPMF, a tax on checking account debits, was increased from 0.2% to 0.38% (after being suspended form January to June). The COFINS, a business tax on gross receipts, was increased from 2% to 3%, and extended to the financial and infrastructure sectors (telecommunications, petroleum, electric energy and mining). The IOF, a tax levied at various rates on loans and other financial operations, was extended to investments in investment funds, and the tax rate on loans was raised by 0.38 percentage points temporarily (from January to June) while the CPMF was suspended. The withheld income tax on investment income was extended to cover income from hedging through swap operations. 13 The authorities increased oil prices by an average exceeding 60%. This improved government income from the difference between domestic oil product prices and prices of oil imports (the petroleum account), which had deteriorated as a result of rising international oil prices.

20 12 fiscal code will regulate Article 163 of the Constitution' 4. The highlights of this complex code are: * Fiscal Planning and Fiscal Targets: All Governments will need to determine and implement fiscal targets with regard to debt, deficits, receipts, and expenditures. The planning and implementation for these targets is formalized throughout the three stages of the budget cycle: the four-year multi-annual plans, the yearly budget directives laws, and the yearly budget laws; * Tax collections: Governments are responsible for establishing, projecting, and collecting assigned taxes in a consistent fashion and to ensure that tax expenditures or subsidies be consistent with established fiscal targets; * Expenditures: Governments are prohibited from undertaking a level of expenditures that is inconsistent with fiscal targets; * Personnel Expenditures: Limits are set for personnel expenditures and for their distribution across government branches; * Public Debt: Senate and Congress are responsible for setting limits, respectively, on the consolidated public sector and the federal bonded debt.;? Privatization Proceeds: Governments cannot use privatization proceeds for financing current expenditures; * Disclosure, Reporting, Enforcement and Control: Law sets obligations with regard to ample disclosure to the public, accounting, reporting, and review. * Penalties: the law restricts transfers and credit to Governments incurring in various events of non-compliance. A separate law will also establish penalties that will apply to officials that do not comply with the provisions of the code. Under this law, states would have stronger institutional constraints on expenditures. Therefore approval of this bill is likely to increase the incentive to improve fiscal performance in general and meet legal debt and personnel expenditure limits in particular. The bill is presently being considered for final approval by the Senate. 25. Social Security Reform. Social security reform seeks to reduce imbalances between contributions and benefits for both public sector and private sector retirees. The 1988 Constitution established a 100% replacement rate rule for the (i.e., retirees earn at least their last salary) on retirement benefits for the civil service (RJUI1 5 ), with no effective provision for actuarial balance. Social security reforms have started to address this difficult issue. In social security reform, the expected sources of improved financial balance are: * Increased contribution time and reduced retirement time due to (i) gradual introduction of a minimum required period of contribution prior to retirement (in lieu of time of service in both the RGPS and the RJU); (ii) longer time in service (in the 14 Article 163 of the Constitution provides for the issuance of a law regulating public finance, debt, guarantees, bonds, surveillance of financial institutions, and exchange rate operations. 5 The federal social security system is comprised by (i) the Regime Geral de Previdencia Social (RGPS), for private and public employees hired under private sector labor legislation and (ii) by the Regime Juridico Unico (RJU), for the tenured civil service.

21 13 RJU) through minimum tenure (10 years in Government service, 5 years in the current position) and minimum retirement age (53/48 for men/women with gradual increase to 60/55, only for the RJU); (iii) elimination of most special pension regimes; * Reduced pension benefits or higher effective contributions/tax collection through (i) new benefit formula for the RGPS which adjusts benefits to time of contribution and life expectancy at time of retirement, with a monthly benefit ceiling of R$ 1255; (ii) introduction of ceilings on RJU pension benefits equal to highest civil service salary permitted; (iii) increased and progressive contribution rates and coverage (extension to retirees in the RJU) through possible constitutional reform;' 6 (iv) extension of income tax on pension and survivor benefits to persons over 65 years old (RJU and RGPS); (v) expansion of contribution obligation to all work related earnings (RGPS); (vi) elimination of multiple pensions or simultaneous pensions and salaries (RJU); (vii) obligation to raise contributions when the difference between benefits and contributions or when the ratio of employer to employee contributions exceed given limits (General Public Pension Law). While these changes will reduce the path of deficits in the RGPS and RJU, social security benefits remain too high to be financed only from contributions. Further reforms, including a removal of the RJU benefit fornula from the Constitution remain a prime requirement to attain financial balance in Brazil's social security system. A possible constitutional reform (the Hanly Amendment) being considered by Congress would make it mandatory for the public sector to hire new workers under the RGPS, thereby lowering the retirement benefit cost of the flow of new entrants to the public sector. Existing employees would continue to benefit from RJU retirement benefits. The companion report on a Proposed Second Social Security Special Sector Adjustment Loan provides a more detailed discussion of social security issues. 26. Reform of State Finances. Brazil has already put in force debt refinancing provisions, debt agreements with the states, and indebtedness regulations that have strengthened the financial constraints faced by sub-national governments. These are: * Law 9496 of 1998, which provides debt relief to the states subject to compliance with fiscal targets (with regard to the primary surplus, debt, revenues, personnel expenditures, investment expenditures and privatizations) and enforces debt agreements through access to constitutional transfers as well as the states' own revenues1 7.Debt agreements with 25 states have been signed. The Government is now seeking to achieve similar agreements with indebted municipalities; 16 Introduction of these changes by law last year was rejected by the Supreme Court. The Government submitted a new draft Constitutional Amendment to permit the changes, now under consideration by Congress. 17 State bonded and contractual debts have been renegotiated under very favorable financial terms that included rescheduling to a 30 year term, a real interest rate of 6 percent, and a cap on the debt service/revenue ratio of about percent. The agreed interest rate is much lower than current real market interest rate, which exceeds 15 percent. Nevertheless, the agreements guaranteed collection of

22 14 * Senate Resolution 78/98, which places fiscal and financial prerequisites and limits for submission or Senate approval of new state debts; and * Complementary Law 96 of 1999, which suspends federal grants and disallows federal loan guarantees and loans from federal financial institutions to those states or municipal Governments that do not meet personnel expenditure limits established by this law. Establishing and enforcing these provisions will strengthen intergovernmental financial relations in Brazil. Coupled with the strong Government commitment to stronger overall fiscal performance, the debt agreements and indebtedness constraints are likely to revert the recent trend toward ever larger sub-national debts. The agreements provide a partial new debt reduction (in that the present value of the rescheduling is below its face value) in recognition of the states' financial distress at the accumulated debt levels. But more importantly, the agreements re-establish the principle that states should service their debt, leading to an interruption of the indefinite accumulation of debts that led them to insolvency. 27. The Government expects that the debt agreements, together with constraints and prohibitions on other sources of indebtedness, will finally force states into fiscal responsibility. States are facing a menu of options in undertaking fiscal adjustment to increase primary surpluses and reduce debts. This menu could include: i) reduction of tax (ICMS) evasion; ii) reduction of subsidies; iii) raising social security contributions; iv) privatizing/concessioning enterprises/public services v) containment of investments; vi) containment of non-labor costs; vii) reduction of special wage benefits; viii) reduction of temporary labor contracts; ix) audit/re-negotiation of service contracts; x) introduction of new voluntary departure programs; xi) dismissals under the new administrative reform; xii) placement of some employees under partially paid mandatory leave; xiii) dismissal of non-tenured employees; xiv) elimination of existing vacancies; xv) establishment of a binding salary ceiling; xvi) establishment of a sustainable pension benefit financing scheme. The guaranteed debt collection andfinancing constraints comprise the basic policy incentive that is presently expected to encourage sub-nationalfiscal adjustment. 28. Administrative reform, discussed in detail below, will also have a fiscal impact. The sources of fiscal savings stemming from the reform are: * the obligation to reduce personnel expenditures to a maximum limit established by Law; * the ability to dismiss employees when personnel costs become excessive; and scheduled repayments through access to the portion of revenues that are constitutionally shared with the states as well as with the states' own revenues. This implies that states now have to pay more than before the agreements. Before the agreements, the accrued debt service was higher, but states could always capitalize debt by not paying, without fear of a punitive remedy. Today, the federal government is applying this remedy to states that do not meet their debt obligations and sates are current on their debt service obligations.

23 15 the ability to hire under the private sector labor regime, where social security benefit provisions are much less onerous and where the ability to reduce redundant employment is available. 29. Administrative Reform. Administrative (institutional and civil service) reform aims at reducing the burden of the wage bill on public sector expenditures and to improve the efficiency in the delivery of public services. The Administrative Reform is chiefly based on Constitutional Amendment 19, issued on June 4, 1998, which modified key constitutional provisions on the civil service. The key changes in the civil service regime included enforceable maximum limits on personnel expenditures, the abolishment of permanent tenure for existing and new civil servants, and introduction of provisions for reducing public sector employment when personnel expenditures are excessive or when employee performance is inadequate. Regulation by law of these constitutional changes is almost complete. They will allow Brazil's public sector to bring down the fiscal burden of the wage bill. The following paragraphs discuss these laws as well as other reforms (privatization, institutional reform, and public sector wage setting) that have a bearing on public sector administration. 30. Maximum Limits on Personnel Expenditures. A major source of fiscal imbalance is the large burden of personnel expenditures, particularly at the sub-national level. A central objective of the administrative reform is to reduce the burden of the wage bill on public sector expenditures. On the average, state personnel expenditures (including wages and retirement benefits) amounted to 55.2% percent of net current revenues in May 1999, the latest date for which data is publicly available. The ratio of personnel expenditures to revenues ranges from 26.% (Roraima)" to 80% (Rio Grande do Sul). Eighteen of the 27 states had wage revenue ratios exceeding 60%, the legal limit established in 1995 (the Lei Camata, named after Congresswoman Rita Camata) to which states would have to adjust. The Lei Camata limits have been reaffirmed and strengthened in the new law regulating Article 169 of the Constitution, which provides for the issuance of limits on personnel expenditures. 19 In the case of the Federal Government, the limit established in the new law (50%) is above the present ratio (46%). In the case of states, the limit established in the new law (60%) will allow nineteen states to dismiss tenured civil servants to reduce the burden of wages. The new law is stronger in that it will prohibit federal credit and guarantees to those states not meeting the limits. To attain the limits, states have the options listed in para. 27. Reducing the burden of wages is a necessary component of any program to improve fiscal performance. A Bank review of employment and wages in the public sector indicates that there are opportunities to reduce this burden, including employment reductions, particularly at the state level, and reduction of wages and/or benefits in some categories of government employment where current wage levels significantly exceed private sector comparators In the case of Roraima, personnel expenditures are relatively low because some of the public employees belonged to the corresponding former territories and are thus paid by the federal government. 19 The limits are also included in the Fiscal Responsibility Bill under consideration by the Senate. 20 Te World Bank, Brazil, From Stability to Growth through Public Employment Reform, Report No BR

24 High personnel expenditures, including wages and social security benefits, is one of the key factors contributing to fiscal distress in many states. Together with other expenditures, it explains why so many states have large primary deficits. As indicated before (para. 13), another factor contributing to fiscal distress is the large level of indebtedness. Chart 2 ranks states by the debt/revenue ratio in December 1998, and also depicts the change in the debt/net revenue ratio between Dec-98 and October-99 and the ratio of personnel expenditures to revenues in May-99. The ranking of Chart 2 indicates which states are most in need of fiscal adjustment. It also shows that many of the highly indebted states also have high labor expenditures (while states with debt/revenue ratios of 1.5 and above have an average personnel expenditure ratio of 0.71, states with debt revenue ratios below 1.5 have an average personnel expenditure ratio of 0.58), suggesting that high personnel expenditure may have contributed to deficits and indebtedness and that lowering these expenditures may be part of the solution. Chart 2 also shows that the highly indebted states did not generally reduce their debt/revenue ratios during 1999, indicating the point stressed before that these states will need stronger adjustments to approach fiscal sustainability. Wage bill reduction targets need to be part of a broader program that covers revenues, expenditures, fiscal reform, tax reform, privatization, administrative reform, and social security reform. 4.0 Chart 2: Brazil - State Indebtedness and Personnel Expenditures _ ! 1.0 I o hdebvrevenues (Dec-98) E Personnel Exps./Revenues (May-99) Change in DebtVRevenues (Dec 98-Oct-99) Source: Staff estimates based on data published by the Central Bank and the Administration Secretariat at the Ministry of the Budget. 32. Under the new regulation of Article 169 of the Constitution, limits on personnel expenditures were strengthened chiefly through introducing penalties on non-compliance with the limits. The preceding legislation only had the target (wage expenditures, net of employee contributions to pension schemes, could not exceed 60% of receipts, net of transfers), with no enforcement mechanism. Despite the lack of an enforcement mechanism, some adjustment occurred due to revenue constraints. Average personnel expenditure ratios declined from 70.2% in 1995 to 55.2% in May Under the new legislation, states and municipalities will be granted an extension through the year 2001

25 17 to meet the limit, with two thirds of the gaps closed by May, 2000 and the remainder by May Non-compliant states will be barred from: * granting salary increases or benefits; * creating new jobs or replacing vacancies; * obtaining federal guarantees on external loans; * voluntary transfers from the federal government; * loans from official credit institutions: senate resolution instructs the Central Bank not to forward to the senate any borrowing request (for IBRD, IDB, CEF, BNDES, etc.) from a state or municipality not in compliance with legal personnel expenditure limits or the fed-state debt agreements (25 states have signed debt refinancing contracts thus far). Fiscal constraints are likely to continue encouraging states and municipalities to further raise revenues and reduce wage and other expenditures. Implementation of the new enforcement instruments listed above is likely to strengthen the pressure on sub-national governments to undertake the adjustments. Together with the instruments provided by the debt agreements, the above remedies, if implemented, should provide a strong incentive for adjustment. The analysis of how this adjustment can happen is presented further below. 33. Tenure in Public Sector Employment. The Administrative Reform introduced important changes in public employment provisions. The most significant is the abolition of universal tenure in the public sector. Universal tenure was introduced by the 1988 constitution, through the so called Unified Juridical Regime (Regime Juridico Unico, or RJU). Prior to the RJU, civil servants obtained tenure through competitive civil-service contests or concursos (with a five year trial period where it was virtually impossible to dismiss an employee having won a concurso). However, the public sector could still recruit under the Consolidated Labor Regime (Consolida,do das Leis Trabalhistas, or CLT), the private sector labor law. About 55,000 employees of the federal labor force of 596,192 are covered by the CLT regime, hired either prior to the 1988 Constitution or under exceptions to the Constitutional provision for hiring short term employees. Under Law 9962 of February 2000, which regulates the 19th Amendment, the CLT Regime can be used to hire civil servants. Employees hired under this regime can be dismissed due to poor performance or redundancies. 34. The impact of this Constitutional amendment will be to increase the flexibility of the public sector to adjust its labor force as well as on retirement costs of public servants. Increased flexibility will come over time as the share of CLT employees in the public sector work force increases due to the ability to hire all employees through the CLT labor regime. The impact on retirement costs will occur even later when employees hired under the CLT retire and receive the much less onerous social security benefits that apply under the public social security system for private employees. 35. Dismissal of Public Employees. Constitutional Amendment 19 establishes provisions whereby a public sector agency can dismiss employees. One situation is where a government's personnel expenditures exceed legal personnel expenditure limits. In this

26 18 case, a government (federal, state or municipal) can use a redundancy arrangement to dismiss employees. This arrangement provides that a government not meeting the legal limits will first reduce at least 20 percent of expenses on special high level and managerial appointments (cargos em comissdo efun,oes de confian,a) in the functions or agencies to be downsized, then dismiss non-tenured employees (servidores ndo estaveis), and finally dismiss tenured employees, with dismissal of core employees allowed only after 30% of other employees have been dismissed. The last step should be based on a normative act by any of the powers (executive, legislative or judiciary) that justifies where (i.e., in which function or agency) the dismissals will need to take place and indicates the savings from the dismissals. Severance for dismissed tenured civil servants is established by the amendment at one month per year of service. The law regulating this matter establishes that dismissals should be based on highest compensation, lowest age, or lowest number of years of service. 36. A second situation for dismissal of a tenured employee arises when the employee's performance has been found inadequate. This new constitutional provision is applicable to the direct administration at all levels (federal, state, and municipal) and will be regulated by a new complementary law (presently at the final stages of consideration by Congress) that indicates the assessment criteria, the evaluation process, remedial training, and criteria for dismissal (two continuous unsatisfactory marks or a total of three non-continuous unsatisfactory marks in five years). The complementary law will also list the core public sector positions that are relatively protected from dismissal. Definition of these positions is required to allow dismissals due to excessive expenditure or poor performance. The dismissals would follow an administrative process where the employee would be fully entitled to challenge and defend against a dismissal decision. Although performance evaluations could well improve efficiency, it is doubtful that they will result in a large amount of dismissals. More likely, dismissals from performance evaluations will be spread in time and amount to a minor fraction of the public sector labor force in any given year. 37. Public Sector Wage Setting. There is some evidence of differences between compensation of public employees and market wages of private employees with similar qualifications. For the federal level, on the average, managerial and technical positions (Cargos Executivos, Cargos de Nivel Superior and Cargos de Nivel Thcnico) earn less than market wages while the lower operational positions (Cargos Operacionais) earn more than market wages. 21 A Bank Study that adjusted comparisons for several worker characteristics (age, sex, race, tenure, and education) found above market wages at the federal level and in the judicial and legislative sectors, and below market wages at the sub-national (specially municipal) level and in the education and health sectors. The finding implies that an improved wage structure could be achieved by reducing compensation of the overpaid categories and raising compensation of the underpaid activities This is based on 1995 data reported in SARE, Boletin Estatistico de Pessoal, Novembro 1999, Table See World Bank, Brazil, From Stability to Growth through Public Employment Reform, Report No BR (February 1998), Vol. 1, Table 3..5, p. 38; and Vol. 2, Table 5.1, p. 35.