Is Mercosur the anchor that will sink Brazil?

The Southern Common Market or MERCOSUR as it is popularly known was established in 1991 by the Treaty of Asunción. Mercosur´s main purpose was to create a FREE TRADE ZONE among its member states, originally Brazil, Argentina, Uruguay and Paraguay, advocating the free movement of goods and services between member states and trading as a common market with other countries and other economic groups. Well, after this brief introduction I ask you, is trading between these countries free? Ask any Brazilian businessman who exports to Argentina and you will have the answer, NO!

Currently living the worst political and economical crisis after its redemocratization, Argentina of Cristina Kirchner has been imposing trade barriers to Brazilian products for years. After her reelection President Kirchner announced that she will continue to impose TRADE BARRIERS to imported goods, including those from Mercosur member states, until the end of her presidency and that Argentine businessmen will have until 2015 to become more competitive. I can understand that the Argentine government is trying to protect its market, nothing wrong with that, but what I can not understand is why the Brazilian government accepts to stay in this so called common market!

Because of Mercosur, Brazil is forbidden to negotiate bilateral agreements with other countries and common markets and for that reason we lose more and more ground in the international trading market. Right now the United States and the European Union are negotiating the creation of a mega common market and Brazil´s incapability of negotiating directly with the rest of the world will eventually cause our economy to plunge into a very turbulent crisis. So I will ask again, is Mercosur an anchor to Brazil?

List of Mercosur Trade Agreements

Here is some data to help you answer my last question. Mercosur has signed only 10 trade agreements with other countries or common markets since its establishment in 1991 with only 2 irrelevant FTAs. In the same period, 543 bilateral agreements were signed at the World Trade Organization (WTO). Have you noticed the weight of the anchor yet? Another important fact is that in 2013 the international trade surplus was the worst in 13 years, US$ 2.53 billion. The first 7 months of 2013 were the worst since the beginning of the series. The Brazilian trade balance accumulated a deficit of US$ 4.98 billion according to the Ministry of Development, Industry and Foreign Trade (MDIC). We just closed the year with a surplus due to a maneuver where we "exported" oil rigs that actually never left Brazil. That's right, we sold oil rigs for foreign companies to be leased back to Brazilian subsidiaries but these oil rigs never physically left the Brazilian territory. Without this operation of US$ 7.73 billion the 2013 trade balance would have a deficit of over US$ 5 billion.

Argentina and the newest member of Mercosur, Venezuela, face a serious economic crisis with hyperinflation, stiff currency devaluation and enormous discredit in the international market. Argentina freezes prices, restricts the purchase of dollars and creates its own inflation rate, something around 1/3 of the estimated market rate. Venezuela´s government controls the market with an iron fist and nationalized dozens of foreign companies. Argentina was responsible for the largest default in history, or in technical terms, moratorium, the unbelievable amount of US$ 81 billion, a masterpiece of another Kirchner, the deceased Néstor. With a severe crisis of confidence our fellow common market members see their currencies devalue at an alarming rate. Argentine peso has lost 3.47 % in one day (01/22/2014) and 18.4 % since November 2013 against the U.S. dollar. In Venezuela the government attempts to control the currency rates with two rates, one for basic commodities such as food and the other for not essential products like airline tickets. The difference between the official and non-official rates are gigantic, one dollar is worth 6.30 bolivars for commodities and 11.30 for not essential products officially and 77 bolivars in parallel market.

You may be wondering... what does Brazil have to do with all this? Everything! Since Argentina is the third largest trading partner of Brazil behind only China and the United States. The risk is huge with serious impacts on the Brazilian economy mainly when it come to controlling inflation, foreign investment and economic growth. The rest of it we already know, high unemployment, real estate bubble, recession, violence, all that follows an economic crisis that Brazil already faced in several other crises like the cruel 90s crisis that led to the confiscation of the savings accounts of every Brazilian worker.

So what is the solution? Well, I'm no expert, but the solution seems pretty obvious. Force Mercosur´s Council to allow its member states to negotiate directly with countries outside the common market threatening to leave Mercosur which would essentially cease to exist without Brazil. After all we have the seventh largest nominal GDP in the world and it's time we use our strength to get what is best for Brazil.  


When the first regional agreement that preceded Mercosur, the Declaration of Iguaçu, was signed in 1985 a regional pact was needed because both countries, Brazil and Argentina, had just come out of dictatorial regimes and did not have international credit. A lot has changed since then, in fact EVERYTHING has changed since then and Brazil needs to adapt to these new market rules. The Economist published an article “Has Brazil Blown It?" in September 2013 almost apologizing for saying four years earlier that Brazil was the country of the future in the article "Brazil Takes Off". This articles shows our incompetence exploiting business opportunities that have been presented to us in the past years and whose main reason was the attachment to Mercosur. 

So one last question prevails, UNTIL WHEN?

The cost of doing business in Brazil

In 2008 the entire business world was talking about how promising the emerging markets were, some said that Brazil would become a major economical player within a decade. Well, what happened with those fantastic predictions? The famous BRAZIL COST happened! But what is exactly the Brazil Cost? In this article I will try to explain in a way everyone can understand, eliminating all the technical and economical terms suitable only for investment firms, what this burden really is.

The BRAZIL COST is pretty much what the title of this article says, it´s the cost of doing business in Brazil, but what are these costs and how they impact trading in Brazil? To facilitate the understanding I will divide this article in topics.

VOLUME OF GOVERNMENT TAXAS

Brazilians work 150 days to pay taxes according to IBPT (Brazilian Institute for Tax Planning). Yes, we Brazilians have to work five months out of a year just to pay taxes. In the 80´s it was considerably less, 77 days in average. An astonishing 41.10% of all workers income goes to the government in form of taxes. For business owners and executives the reality is equally brutal, payroll taxes cost in average 58% of the salaries for example. The latest tax related absurd that made the news was the Playstation 4 case. In Brazil Sony´s new gaming console will cost R$3.999 (Brazilian reais) around U$1.845 (American dollars) with a R$258 discount given by Sony. In the United States the same console costs U$399, 4.62 times less that in Brazil. It´s cheaper for a Brazilian gamer to hop in a plane to Miami, buy the console and come back home (U$899 airfare + U$399 console = U$1.298). There are so many other ridiculous examples that would turn this article into a book if we listed than all, so I will give you just one more example, cars. The same Toyota Corolla cost in Brazil more than double that it cost in the USA.

Now imagine the kind of impact taxes have on company´s revenue and strategies, Sony´s image was unquestionably harmed by this episode that truly had nothing to do with their business practices but with the Brazil Cost.  

COMPLEXITY OF THE TAX SYSTEM

I challenge any CEO of any multinational to send their most trustable accountant to Brazil and without any help of a Brazilian tax specialist take over the operation. I guarantee one of these two results: your company will go bankrupt or your accountant will kill himself. The complexity of the tax system is not just inefficient is design to trick business owner to play a nasty game of favor trading and corruption. Some businesses wouldn´t survive if they pay all taxes, so they crook their books. One day they will be caught by an inspector and will have two options: pay a huge fine and face a lawsuit or pay the inspector a monthly bribe for the rest of his life. Trust me there is no exaggeration in what I´m saying, there are a total of 90 taxes (see the list) divided in federal, state and city taxes, plus all sorts of fees and rules that would drive any accountant mad. Just the current tax rules would produce a 112,000,000 pages book.

BUREAUCRACY

Everything in Brazil is bureaucratic from starting up a company to getting married. There are dozens of documents required, all of them have to be authenticated in a notary's office. To import goods to Brazil you need a special license called RADAR, you need an uncountable amount of paper work and takes forever. While you can nationalize imported goods in England in two days in Brazil takes in average fifteen days and if your shipment gets red flagged just God knows when it will be released. Brazil is ranked 116ª in a list of 186 best countries to be an entrepreneur, it takes 13 procedures and about 2.600 hours to start a business in Brazil while in Singapore you need only 82 hours. The licensing process is cruel and it does not distinguish between a high risk business like a Gas Station to a low risk one like a Bakery Shop, the unfortunate baker would have to wait up to 180 days to legally open the shop and having to support costs like rent in the meanwhile, it is a lot of pressure to a new business cash flow to endure and for this reason many businesses are doomed from start or begin to operate without the appropriate licenses.

INFRASTRUCTURE

According to the study conducted by Mckinsey & Company the lack of investments in infrastructure in the past 20 years caused a gap of over 5 trillion reais, over 2.3 trillion dollars, to be resolved. While China invested in the last 20 years 8.5% of its GDP per year, Brazil only invested 2.2%. Brazilian ports quality are ranked 135º in a list of 144 according to the World Economic Forum, it costs in average twice as much to Brazilian companies to export than in other countries. There isn´t enough storage space to keep our grain production so farmers have to leave it in the open and try to sell it as fast as possible, even if the market isn´t favorable. The United States have 224,792 km of railroads, Brazil has only 28,538 km connecting somewhere “far far away” to nowhere at all. For example the North South Railroad, it´s been under construction for over 25 years and already consumed over U$8 billion dollars is far from completed, from the total of 4,576 km planned only a bit over 1,500 km is ready and the best part, is not 1,500 km of continuous tracks, it´s in bits and pieces connecting nothing to nothing at all. The roads are pretty much what´s left, but they are not in great shape at all, even in major cities like Rio de Janeiro e São Paulo the conditions of the roads are precarious. We have a highway popularly known as the DEATH ROAD which registered close to 4,000 accidents with 155 deaths this year alone and this highway connects two major cities in Brazil, São Paulo and Curitiba. In the air the scenario isn´t much better, Brazil have a great amount of problems with its airports, mainly because there isn´t enough airports or flights or airliners to supply the market and the result is chaos.

North South Railroad - only the green part is ready

The Brazilian government took over 20 years to acknowledge the fact that the only way to improve the country´s infrastructure and therefore its competitiveness in the global market was to open the transportation sector to private investors and began the biggest privatization and concession of roads, ports and airports in Brazil´s history. The expectation for the near future is to double the amount of ports and flights, but other problems might linger for years to come like railroad construction and grain storage for example.     

CORRUPTION

 

Corruption is present in every public organization in Brazil, from the Ministry of Transports to the public health care center next to your home. Corruption is so present in the Brazilian people´s lives that we get surprised when a Police Officer of any branch doesn´t accept a bribe. Multinationals like Siemens and Alston are currently under investigation for their involvement in a bidding cartel case related to the São Paulo Subway System estimated in over 1 billion Brazilian reais. I very much doubt these companies would offer bribes to city officials in their HQ countries (Germany and France), they know better, but in Brazil why not? After all it´s how things work around here. The most famous corruption case the voting-buying case known as “Mensalão” was just closed and the claimed leader of this Mob (I don´t know a better word to describe them), Jose Dirceu, a former Minister of President Lula, was sentenced to 7 years and 11 months in a semi-open regime, where the convict can work during the day and sleep in prison, but after one third of his sentence he would go to a open regime, pretty much like freedom. Now I ask you if someone offered you U$20,000,000 dollars just to sleep in a prison for 2 years, would you take it? Presuming the money wasn´t originated from corruption, let´s say a Sheik was bored and wanted to see if you would do it, would you? This was the first case related to corruption involving important politicians in the government hierarchy that resulted in jail time, most cases result in nothing. Former President Collor faced an impeachment process, resigned and was considered unelectable for 8 years as the result of a corruption scandal during his presidency is now a Senator and, believe it, is in charge of the federal budget.

I guess by now you have a sense how corruption affects businesses in Brazil, beginning with an ethical perspective, if you are a 100% honest executive would you manage a company involved in government bidding? If you don´t play the game you are out, if you play, God knows what´s going to happen, probably nothing, but would you be able to sleep at night? Could you face your God on Sunday´s church mass?    

VIOLENCE

After “Carnaval” and “Caipirinhas”, violence is probably the most well known feature about Brazil, but focusing only in a business point of view, how violence impacts a company´s business strategies? Finding a secure warehouse is the first challenge, there are warehouses “condos” that offer private security, but costs a lot more than a “street” warehouse. If you decide to rent or buy a warehouse on the street, you most likely will have to hire a security guard team, install cameras and alarms and pay a stiff insurance premium. On the transportation side the carrier charges you an insurance fee on top of your invoice, let´s say your load is worth U$100,000 you would pay around U$1,500 of insurance plus the transportation fee of course. If your load is worth more than R$500,000 (Brazilian reais) you would need to hire an armed escort service otherwise the insurance won´t accept your claim.

QUALIFIED LABOR

In Brazil exists a phenomenon that I´ve never seen anywhere else in the world, we have great public universities and awful public elementary and high schools, as a consequence of this phenomenon until a few years ago pretty much only students from wealth families which had the opportunity to study in private schools were able to get into a public university because the admission test was too hard for the public school curriculum. Students from low-mid class families, forced to study in public schools all their lives, couldn´t continue their studies because they couldn´t get into a public university and the result of this distorted educational system is non-qualified labor. Hundreds of second class private universities popped up all over the country trying to bite a piece of this incredibly large market of students boot out of the good universities, so now pretty much everyone have an university degree but not a lot of qualification.

Today there are a reserved amount of vacancies for students originated from public schools in all public universities in Brazil, an attempted to include students from all social classes into the public universities system. Other government programs give grants to public schools students to study in private universities and dozens of technical training programs were developed to qualify workers around the country, but there is still a large gap to fulfill.    

  

INTEREST RATES

Brazil has the HIGHEST interest rate of the world according to the research conducted by the website Moneyou, 3.40% per year after deducting the inflation rate. To compare, Mexico has 0.30% real interest rates. The SELIC, basic reference government interest rate, is 9.5% per year today, that’s the rate banks borrow money, on top of that they add the bank spread, which is their profit plus the default. The credit card interest rate today is 11.90% a MONTH! Want to buy a car? The interest rate for this operation is 3.1% a month in average, in the end of 36 months you´ve paid more than 2 cars. For companies the scenario isn´t much brighter either, short term loans have in average a 2.2% rate per month. There are government banks like BNDS that offer much better rates, but is away more bureaucratic too, making credit taking not only risky but labor intensive as well.

Everything I said in this article is based on facts easily verifiable on the Internet (I´ve included some links as well), but this article instates not only the facts but my opinion too. Some might say that things are not so bad, that Brazil is a great place to do business, I think you should make your own opinion, do some research, ask other people, come visit, do whatever suits you, just don´t buy that same old crap where Brazil is the country of the future because it isn´t!

Don´t get me wrong I love my country, if someone tries to invade Brazil I would fight for it, but doing business and living in this country is not an easy task, I know there is someone from Iraq saying: “You don´t know what’s bad, we are at war!” 

It´s true, but I live in a country where more people are murdered every year than Iraq in war, don´t just believe me, go ahead and check. Of course there are honest cops, public servants, even politicians, but they are a minority, actually the honest ones are used as an alibi by the corrupted ones to justify the existence of the entity they work at.

 

I honestly hope my country progresses to a better future, I´m also European (Portuguese) and I´ve lost count of the times I said: “I´m leaving this country forever!” but here is another quality about Brazilians, besides beauty (don´t hate me because is the true), we have this incredible ability to believe that the best is still to come and hopefully our politicians won´t prove us wrong.