BASIC BUSINESS IN BRAZIL
Three concepts:
First of all, I would like to comment on three often heard business related phrases that might not be familiar to non-Brazilians: "custo Brasil", "Brazil grows at night" and "caixa 2". These are terms that one encounters constantly in commercial and financial dealings. While they may not be proper, legal, or even factual, they express the art and science of doing business in Brazil.
Custo Brasil
Broadly defined, this is the extra cost of doing business in Brazil, above and beyond that which would be normal if it weren't for corruption, government inefficiency, legal and bureaucratic complications, excessive taxation, and sub-standard infrastructure. The concept is vague, but very real. The term "custo Brasil" means the cost of doing business in Brazil. This varies widely according to the sector and geographic area. An example of this is the cost of handling containers in Brazilian ports, which is double that of the US or Europe. In a trip to Brazil, I constantly heard farmers complain that they could compete with Argentina, US and Europe because of the "Brazil cost", even though they could grow their crops at very competitive prices. By the time the farmers had met all regulations, paid off tax inspectors, shipped soybeans to the ports, they were much more expensive than the same product from other countries.
Brasil grows at night
"Brasil cresce de noite." This is a well-known truth. No matter what the government does to hold back the people, Brasil will get by and grow, even if at night. The idea here is that during the day, the government machinery stifles economic growth, but when the bureacrats sleep, real progress occurs. This is also the idea behind the concept of "jeitinho", in which a person always finds "a little way" around rules and regulations. While this is a solution to some of the difficulties inherant to the "custo Brasil", it is also part of the problem.
Caixa 2
I have never ever seen a business (or any organization, or even some people) that didn't have a "caixa 2". Translated, caixa 2 means "Cash Account Number 2" . It is all money or assets that are kept off the books and official records. This, of course, keeps it away from the greedy eyes of the tax authorities.
Three Big Problems:
When talking about Business in Brazil, three things come to mind; government, inflation, special interests. Somewhat like the USA, Brazil is a capitalist market driven economy….. Well, almost and maybe. The differences are as vivid as the similarities. A quick work about each:
Government.
In Brazil the role of government is much more intrusive than in US. This is not only a matter of taxation, but also in legal organization and in the regulatory role. In small and medium businesses, this aspect is less evident. In large scale foreign investment situations, a close personal official relationship is fundamental. Lobbying by large corporations and trade groups is even more aggressive than in US. Government contracts are often awarded according to relationships and connections rather than pure technical or financial merit. This is a result of the paternalistic, nepotistic culture that has existed for hundreds of years. Examples of this are the Minister of Finance, Chico Lopes, who was putting public money in his private pocket, or Fernando Collor, the ex-President, who wanted a cut of everything. All in all, I think slowly things are improving. Many State Enterprises have been sold off and regulations have been liberalized. There is hope, but great problems still exist. The biggest problem is the public deficit, a structural situation that cannot be fixed without grave social and political consequences. As in all other economic plans instituted since 1964, the Real Plan is doomed to failure unless this problem is addressed.
Inflation
For most of the latter half of the 20th century, inflation has been a way of life for the Brazilian. Basically this was a tax imposed on the poor, allowing government to spend freely. It has been for more than four decades a primary source of public sector financing. Tax revenues were indexed to inflation but many government expenditures were not. Salaries were frozen, basic goods were only chilled down a bit. Government spending far exceeded income, so inflation worked as a mechanism to hide the sins of the federal government. With the introduction of the new currency and Economic Plan, the Real, these problems were exposed. Social security expenditures far exceeded income, tax transfers from federal government to States and municipalities were excessive, public sector payrolls were bloated and salaries alone absorbed 80, 90 and even beyond 100% of revenues. The Brazilian government is proposing now is a new agenda to "put the country on a safe path to fiscal solvency." Quoting from a government document: "This encompasses both structural and institutional reforms, which will change the quality of fiscal management and fiscal results, a new approach to the budget process, strict regulation on fiscal responsibility and a Plan of Action for 1999-2001 covering mainly the Federal government budget but also action at local level and putting special emphasis on the need for a rational management of the social security accounts." Well, we will see. Like Saint Thomas, I will believe it when I see it. But thangs are better. There is an awareness of the problem and the need to fix it is Brazil is going to exist as a modern society.
Special Interests.
That there are strong Special Interest groups in Brazil is not a surprise. They are everywhere in the world. The problem in Brazil is that the middle class and the tax payers do not effective challenge the controlling interests. Now a quick look at the main special interest groups:
- Government itself, mainly elected officials, public employees and state corporations
- Large financials interests, including banks, communications conglomerates and agricultural landholders. The large industrial groups such as FIESP, and traditional manufacturing interests are lost a great deal of influence in the last 10 years.
- Political parties, that favor social programs without accountability or any corresponding source of revenue. These groups, mainly but not exclusively from the left, stand in the way of any rational reforms that could begin to fix some of the structural problems.
These three groups work closely together to insure that the status-quo is maintained. It may seem to be a contradiction, but both the right and left side of political spectrum have joined hands to exploit the poor and middle class through regulation, inflation, monopolistic practices, costly yet inefficient public services, excess taxation, top heavy self-serving bureaucracy and lax criminal law enforcement,
The present government says that its main objective is to achieve a steady and substantial reduction of our enormous ills, injustices, and social imbalances, and to do it in an efficient, mature, and responsible manner.
All the politics in the world, and all the good intentions will not by themselves solve Brazil's problems. Howver, much is being done. Some recent concrete steps taken are:
- Trade Liberalization: the comprehensive trade deregulation program launched in 1990 resulted in the virtual elimination of non-tariff barriers to imports;
- Privatization: since privatization began, 32 companies have been turned over to private owners;
- Productivity: companies have tended to focus their priorities on overcoming inefficiencies through quality and productivity programs, with a resulting upturn in productivity of 27% over the past 3 years in the industrial sector
- Foreign Debt: negotiations with lenders have come to a successful conclusion and Brazil now has a comfortable and unprecedented level of international reserves, a record US$ 40.8 billion;
- Stabilization: introduction of a new stabilization plan (the Real Plan) dramatically trimmed inflation rates and the prospects are for sustained stability.
The balance of results accomplished by the Real stabilization program is encouraging. However, unless government has the political will to control expenditures (most of all the lush pensions for public and state employees), there is little hope of major change, and Brazil will continue to be a good place to live and invest, instead of a great place.
Brazil and its politicians are aware of this. By its own statements, the federal agenda for change is far-reaching and varied, and relies heavily on interdependent actions. It involves reform of the State, of tax and social security systems, and of labor relations; extension of privatization actions including elimination of constitutionally established monopolies and removal of all restrictions to private undertakings. In short, this agenda entails a massive move toward institutional modernization as the key mission entrusted to government. The problem is, of course, that the same people who must guide and implement these changes are those who most benefit by the status-quo.
DESPACHANTE
Despachante is the term used in Brazil to refer to the
person MIDDLEMAN or facilitator of business transactions. This is the insider who will be able to help out at any given moment. The terms of the facilitator are simple, he wants your friendship and he wants it now. To North Americans, this instant intimacy can seem like assault and battery by abra‡o. Another important aspect to the friendship is the lavish giving and taking. Whether it is of money, favors ("jeito") or gifts, it is a way of life that North Americans often have a difficult time not getting into. The trick is to do it with grace and genuine regard for your new "old friends".
This page is under construction!
Please come back later.
