Brazil: The New Land of Opportunity?

(Over Kind Man)

At first glance, it might seem old hat to anoint Brazil as the land of new opportunity. Long characterized by crime and corruption, Brazil has historically fallen short of its moniker as “the country of the future.” However, data has emerged in recent years suggesting that Brazil’s economic forecast is brighter than most might think. Despite a 1% contraction in GDP during 2009 (much of which can be attributed to the worldwide financial meltdown), TradingEconomics.com refers to Brazil “…one of the fastest growing emerging economies in the world.” Brazil’s economy also “…ranks highest among all the South American countries”, as well as having acquired “…a strong position in the global economy.” The country stands as the richest South American country in terms of GDP, and despite the recent dip in growth, Brazil is showing signs of an recovery, propelled largely by tax cuts on consumer goods. As we head into the New Year, you may be thinking about greener pastures. In this first of a series on recovering economies, we’ll look at what Brazil has going for it economically speaking – the opportunities, the government incentives to producers, the fastest-growing industries, and what the future has in store.

The Opportunities

The business opportunities in modern-day Brazil are not confined to native citizens. Indeed, citizens of presumably better-off, developed countries are concluding that, in many cases, Brazil offers something of a new ‘promised land.’ A recent BBC report, highlighted the story of a Lebanese entrepreneur named Jimmy who came to Brazil after working in France for six years. While conceding that France is, “…a great country to visit”, Jimmy maintained that, “…there’s a lot of restraints: you have to pay lots of taxes, food costs are high, so there’s lots of things that push you to come here to Brazil.” And that’s what Jimmy did, opening his own jeans and clothing manufacturing business while working at a restaurant on weekends. Taxes, especially, are a major driving force behind multinationals and expatriates flocking to Brazil. When reminded that he paid taxes in Brazil as well, Jimmy countered frankly, “…you can’t compare the European taxes with the Brazilian taxes.”

(Claudio Matsuoka)

More broadly, the BBC reports attributes much of Brazil’s burgeoning opportunity to the fact that, “…street traders and hustlers” hocking t-shirts, toys and computer games has been supplemented by, “…more formal enterprise.” This stands in contrast to what BBC calls, “… informal bustle and street dynamism”, which limited Brazil’s economic appeal to outside interests for decades. What explains the change? Several factors, not least of which is the introduction of democracy 25 years ago, spelling a reduced role for the military in politics. Prior regimes, with their preference for resolving domestic conflicts with force, created uncertainty amidst which business activity simply could not flourish. With these regimes a thing of the past, Brazil’s modern governments began actively courting multinational investors and businesses to the country with various incentives. Tax breaks to exporters have been foremost among these incentives. In 2005, International Tax Review reported that Brazil had enacted, “…special tax regimes” to exporting local entities, as well as companies working in the IT space. Retirement program taxes, “…levied on importation of fixed assets and services used in software development and the supply of IT services”, for instance, were suspended for both IT companies and all exporters for whom exporting comprised, “…80% of their annual gross revenue.” Taxes levied on, “…importation of new capital goods (for example, machinery, equipment, and tools)” were also suspended during the same year.

The Incentives and Top Performers

More recently, BusinessWeek reported in November 2009 that Brazil had cut taxes on furniture and construction supplies. The, “…Tax over Industrialized Products (IPI) for the furniture sector, ranging from 5 to 10 percent depending on the product, will fall to zero till the end of March 2010”, while the cuts on construction supplies, originally slated to end in December, were extended through June 2010. BusinessWeek states that these cuts were part of a broader portfolio of incentives, accompanying, “…tax cuts in such sectors as vehicles, construction supplies and household appliances to boost domestic consumption and help its economy bounce back from the financial crisis as soon as possible.”

(Esdras Calderan)

By and large, the incentives have worked. In its 2009 Letagum Prosperity Index, Prosperity.com noted that, “…490,542 new businesses were registered [in Brazil] in 2007, the second highest figure in the Index.” While computer access is “…very low by global standards at just 16 personal computers for every 100 citizens”, this still represents the highest figure in all of South America. Payment for royalties is high, “…indicating that Brazil is able to capitalize on its intellectual property.” Perhaps most conducive to entrepreneurial opportunity is the relatively high level of freedom Brazilians enjoy. According to the Prosperity Index, Brazil boasts, “…the highest possible rating for freedom of movement, religion, and speech”, good for sixteenth on the personal freedom section of the Index. With eight out of 10 respondents believing that Brazil is a good place for minorities, perhaps this is why businessmen like Jimmy feel comfortable setting up shop in Brazil.

Some of the fastest-growing Brazilian industries have been hinted at thus far. Consumer goods remains an economic juggernaut, while exporting continues to be emphasized and promoted by President Luiz Inácio Lula da Silva’s government (or known affectionately as ‘Lula’). The nation’s consumer electronics industry, in particular, is said to be, one of the fastest growing consumer markets in the world. The Brazilian automobile industry is also growing despite the recession, projecting a compound annual growth rate of 10% from 2009-2013 according to PR-Inside.

What The Future Holds

Indeed, the road ahead appears quite prosperous for Brazil. Bloomberg reported on December 19, 2009 that Brazil’s jobless rate, “… fell for a third month to the lowest level of 2009” – 7.4%. The country is reportedly expected to add over 2 million jobs in 2010, according to Labor Minister Carlos Lupi. Zeina Latif, chief economist for Brazil at ING Bank, was quoted as saying that domestic demand and demand for consumer goods, “…weren’t hurt by the international crisis.” In a similarly optimistic vein, the Wall Street Journal sees Brazil’s economy growing by 5.5% in 2010, granting that, “…it’s perfectly possible for industry to grow at a rate of 6% to 7%.” Looking ahead even further, ThePicky sees Brazil becoming the fifth largest economy in the world by 2050. All things considered, it’s no wonder why Brazil’s $1.5 trillion economy is being called the new land of opportunity.