Brazil: It is time to take clever decisions

The Brazil’s GDP (gross domestic product) was just 0.9% in 2012. This poor result has rekindled the debate about the Brazilian government ability to ensure the economic development. After a considerable period of growth in the last decade with 3.6% average annual rate, according to the IBGE (Brazilian Institute of Geographic and Statistic), Brazil has been experiencing difficulties in maintaining this level which is well below of the main BRICS (Brazil, Russia, China, India and South Africa) that grew at annual average rates, in the last decade, at levels much better than Brazil: China 10.3% – India 7.1% – Russia 5.3%. Only South Africa had a similar Brazilian average growth of only 3.6%. In order to boost its economy in the past decade, Brazil has taken advantage of its employed population, instead of productivity increases with investments in better equipment and information technology to support workers and companies. In accordance with BCG (The Boston Consulting Group), from 2001 to 2011 74% of the Brazilian GDP growth is related to the number of the people employed. Only 26% can be considered productivity growth. Instead, the others main BRICS have productivity growth of their GDP much better than Brazil during the same period of time: China 93% – India 82% – Russia 40%. Therefore, it is very important a change in the Brazilian economic politics to increase productivity to meet its goal of growing GDP more than 4% per year. But the country has not done it yet. The latest government measure in 2012 to stimulate the Brazilian economy is based just in stimulus of consumer spending by the domestic market. It has increased the population indebtedness to dangerous levels. According to the Brazilian Central Bank on August 2012, total household debt was equal to 44.46% of the income accumulated in the last 12 months being the highest percentage since 2005, when the rate was only 18% of the accumulated income year, at the time when the bank began to carry out this survey. Financial analysts generally have insisted on the need to avoid this type of impromptu solutions to keep the economy running. They have suggested performing massive public and private investments in infrastructure to increase productivity, thus the results acts on two fronts simultaneously: Develop and create technical possibilities to set up new business broadening the base of jobs and also leveraging the currently economy sectors that depend directly on the quality services at competitive prices. These initiatives might be a key factor to attract more foreign investments and one of the main solutions pointed out by the investors to boost the GDP.

The energy generation and transmission sectors, telecommunications, port operations services, airports, road and rail transport deserve special attention to increase country’s performance. These services need to be improved to eliminate infrastructure bottlenecks allowing companies to implement a competitive logistics structure to flow raw material, goods and services into domestic market and to be exported. The lack of the appropriated infrastructure has increased the Brazilian production costs becoming the products more expensive and reducing the Brazilian companies’ competitiveness. Such difficulties can move away foreign investors who are looking for better business opportunities among the most promising emerging markets. According to a 2012 study from KPMG – a global network of professional firms providing audit, tax and advisory services – comparing international business locations in mature and high growth costs, Brazil is the worst among the main BRICS. In order to make business in Brazil can be as expensive as in developed countries like the United Kingdom, the Netherlands, Canada and France. The study measures business costs in four sectors: Manufacturing, R&D, Digital and Corporate Services considering nineteen kinds of industries. The combined results were expressed as a percentage with the United States assigned in the baseline. A percentage higher than the baseline indicates lower cost than the USA. The opposite indicates higher cost than the USA. On the chart 1 is possible to check the bad Brazilian position close to developed countries and below of the emergent countries.

Chart 1

Brazil Article

According to World Bank data, besides the mentioned issues, in 2011 Brazil is in second position among emerging economies in foreign direct investment with $71.5 billion and ranked fifth in the world ranking. China, including Hong Kong and Macau, is in the first position among emerging economies and also being the first in the world ranking with $312.3 billion at the same year. Fortunately, Brazil is holding a very good position, but it could have been a more attractive destination for investors if it had done better its “homework” and corrected its structural problems to reduce the high cost to make business.

Furthermore, the country must improve the workforce competitiveness raising their level of knowledge and education, as well as the quality and the technological level of the equipment used in services and production processes which undoubtedly also concur directly to the low level of productivity. The data demonstrate that Brazil is far below than is required to have a performance compatible with other industrialized economies. According to BCG (Boston Consulting Group) on the chart 2, the investment per employee has not been increased in the country for 20 years. It means that over the years, the money applied has been enough just to alleviate the depreciation of earlier investment and to adjust the stock of capital to accommodate new workers. In the 1990, Brazil was investing $41,000 per employee and in 2010, just $44,000 which is a rise of only 7.32%. This situation place the country in a severe disadvantage compared to the other important economies. China had held just $16,000 investment per employee in 1990, but in 2010, they have been increasing its level quickly reaching $34,000 which is a rise of 112.5%, a good achievement even if compared to the other developed countries’ progress at the same chart 2. Hence, considering the current rate performance, probably China will surpass Brazil’s position during this decade.

Chart 2

Brazil article II

Other important factors that are causing too much trouble to attract and enhance the investment level are those related to the business environment which scares companies. For example: the high expenses with taxes, bureaucracy very tricky to open and close businesses, the high degree of complexity to control, calculate and pay the different types of taxes and a difficult and slow regulatory process to get environmental licenses are considered a high risk factor to setup companies.

According to a study of IFC (International Finance Corporation) and the World Bank by analysis of the index – total tax rates (% of profit) in 2011, Brazil is one of the countries that more collect taxes in the world occupying the 13th position. The midsize companies established in the country have supported on average 69.3% of taxes and fees on commercial profit. Even for this company profile was required 2.600 hours per year to count, register and collect taxes of any kind placing Brazil in the last position about this indicator in the world in 2011. The second worst belongs to Bolivia with 1.025 hours. The USA, China and India required 175, 338 and 243 hours, respectively to carry out the same tasks. Therefore, the country should streamline the state bureaucracy and review the heavy tax burden that intimidate investors and reduce the possibilities to increase the inflow of capital in the country. If Brazil reduced the taxes and bureaucracy, many new companies probably would be established by national and international investors. Thus, the country could increase GDP faster and simultaneously to expand the tax base and so might get more in taxes than have been collected, even the country adopted lower rates. This change could make the country’s products more competitive both domestically and externally.

In accordance with World Bank data in 2011, GDP per person employed in Brazil was in 78th position in the world with $13.7 million and has been evolving slowly since 2009. The growth in this period was just 5.3%. Meanwhile, in 2011, the other BRICS countries like Russia and China were in the 58th and 75th position, respectively, and growing faster than Brazil. Between 2009 and 2011 China grew 8.5% surpassed Brazil and has taken distance. Even South Africa in 79th position worldwide is close to overcome the country. Hence, the 2012 short rate of Brazil’s GDP growth of 0.9% will place the 2012 indicator on the chart 3 even worse, when compared to the other emergent countries.

Chart 3

Brazil article III

In accordance with the Brazil’s Ministry of Planning, the government plans to make massive investments in railways, highways, airports and energy in 2013. In fact the country is trying to recover everything that could have been done over the eight years of the Lula’s government. Of course the Ministry did not mention the last government. But for experienced people in Brazil’s issues is easy to understand this lack of initiative. During the last rule, the authorities just accepted the current infrastructure available and they did not make the required investments in logistics sectors that are essential to offer adequate services, imperative to setup the appropriate support to keep the development flowing without ruptures and so ensure a steady and strong economic growth continuously, attracting new businesses and reducing unemployment and social problems consistently. These shifts might have offered the foundation to achieve the economic virtuous circle. As a result of this shortcoming of planning the Dilma Rousseff’s government is “slipping”, facing difficulties when it should be going forward faster. Remained for her administration “to run behind” of everything left to be done. However, the infrastructure enlargement takes a long time to be concluded and give result. It is not so easy and fast to implement the required changes such as new airports and harbors to be used in a short term. It can take years. Hence, the country is losing opportunities to grow faster in a strategic moment, when European and American economies are struggling yet to overcome the world economic crisis and Brazil could have been an excellent business option.

According to the federal government’s plans for the current year will be signed contracts with public and private companies for road and rail network expansion. The plan foresees investments of $20 billion in 7,500 Km of roads. The goal is to invest $11.2 billion in the first five years and the remaining $8.8 billion in 20 years. In the railway sector the investment is going to be even greater to set up 10,000 km of new routes. The plan foresees investments of $26.7 billion in the first five years and $16.7 billion within 25 years. The total railway and road investment amounts to $83.4 billion. The government’s target is to restore the integrated planning of the transport system which is very important to link highways, railways, waterways, ports and airports with the main production chains. These initiatives are critical to adjust the Brazilian supply chain network and essential to ensure the inflow of money in new businesses and the expansion of the current businesses as well.

The federal government also is working to ensure investments in others important logistic sectors like harbors and airports. Last December an important federal department – Special Secretarial of Ports announced a plan to invest $25.8 billion to update 27 ports across the country to be started in 2014 up to 2017. In 2013, another federal department – Secretarial of Civil Aviation also announced at the same month resources of $3.48 billion to update 253 regional airports and to build 17 new regional ones. The goal is to improve the service quality and to increase the amount of routes managed by the air companies.

Last March, the Sunrise Group, the most important Chinese soybean trader decided to cancel almost 2 million tons of cargoes, because shipments were delayed by an huge port congestion in Santos, the main Brazilian port located in São Paulo state. This is a clear signal about what can happen if the current obsolete logistic infrastructure continues in the same way.

Unfortunately, the investments are being planned to be implemented with years of delay. Probably it could have been started some years ago by the previous government. It could have pushed vigorously the Brazilian development and certainly it should have helped to avoid the GDP growth rate of only 0.9% in 2012. The current year will be very important for the country. The governmental actions to be performed will indicate whether the effort for the logistics infrastructure development is on track. There is no more time to waste on political speeches that like to “surf” on previous good results. It is time to point out the “boat forward” correctly and overcome the obstacles that hinder the economy advancement.

Let us see what is going to happen next.

Raimundo Oliveira

Political and Social Scientist

About Oliveira

I'm a Social Scientist interested to study and provide analysis of global relevant issues. I'm bachelor in Social Sciences at Federal Fluminense University, and also earned Logistics degree from Paulista University and postgraduate in Business Management at INPG / Castelo Branco University, Brazil. For professional contact send an email to rrsoliveira@hotmail.com
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