Brazil’s Low-hanging Fruit

 

Brazil’s newly elected president, Jair Bolsonaro, campaigned on a platform of liberal economics and deregulation to unleash the repressed spirit of the Brazilian entrepreneur. As I discussed last week(Link ), it is well documented that Brazil is an exceptionally difficult place to do business   compared to  other countries. The very high cost of regulation and bureaucracy forces small firms into the underground economy and gives a formidable advantage to larger firms with the scale and resources to deal with the regulatory burden. The good news for the incoming administration is that Brazil is  currently at such a low level of governance that any serious and concerted effort to deregulate should produce very high benefits over the short term.

In the World Bank’s ease of Doing Business Index, Brazil is by far the worst ranked of the major economies in emerging markets. The chart below shows how Brazil ranks compared to several emerging market peers and also compared to New Zealand, the country with the highest ranking in the World Bank’s Index. The data is collected from each country’s most important business center. In the case of large countries ,such as Brazil, the World Bank looks at two cities; Sao Paulo and Rio de Janeiro are used as the reference cities for Brazil with a weighting of 61% and 39%, respectively. What this means is that conditions for doing business are certainly significantly worse in other regions of the country.

The World Bank ranks 190 countries on ten different measures; starting a business, dealing with construction permits, getting electricity, registering property, protecting minority investors, paying taxes, trading across border, enforcing contracts and insolvency resolution. Brazil has the lowest ranking in this group in six of the ten categories. For paying taxes, a firm in Brazil needs 1,958 man-hours for the task, which is 6.6 times the second-worse, Chile, and 14 times more than New Zealand (57 times the 34 man-hours required in Hong Kong).

Low-Hanging Fruit

The good news is that things are so bad in Brazil that a concerted effort could bring rapid improvements. Brazil has a great amount of low-hanging fruit to harvest. Three years ago India’s incoming Prime Minister Narendra Modi specifically committed himself to a deregulation agenda to improve India’s ranking in the ”Doing Business” Index. In this short period of time India was able to bring its ranking from 130th to 77th, a remarkable achievement. Modi has set a target of reaching a top 50 ranking over the short term, which would place India in the global elite in terms of this measure. Modi correctly understands that the main beneficiaries of deregulation are small businesses. He said last week:

“The biggest benefit of Ease of Doing Business goes to the MSME (Micro, Small and Medium Enterprises) sector. Whether it is permissions for constructions, availability of electricity or other clearances, these have always been major challenges for our small industries.”

The chart below shows the evolution of both Brazil and India in the “Doing Business” rankings for the past three years. India has improved a remarkable 53 spots, improving its ranking in nine of ten categories. The most remarkable improvements have been with construction permits and access to credit, two areas of fundamental concern for small businesses. Brazil has improved 14 spots over the period, but remains at an extremely poor level. Brazil improved its ranking in five categories, but also worsened in five.  In the cases of securing construction permits and paying taxes Brazil’s ranking is among the worst in the world and got worse over the period. One area of some progress is for starting a business where the ranking has improved from 175 to 140 (from extremely poor to only very poor) because of improvements brought about by the launching of online systems for company registrations, licensing and employment notifications.

 

Macro Watch:

  • A users guide to future QE (PIIE)
  • Economic brake-lights (Mauldin)

Trade Wars

  • Henry Paulsen gets negative on China (WSJ)
  • U.S. accuses Cina firm of stealing Micron secrets (Wired)
  • Asia’s next trade agreement (Brookings

India Watch

  • Can the rupee become a hard currency? (Livemint)
  • Can India become the next $10 trillion economy ?(Wharton)
  • Apple is losing share in India to Chinese (Reuters)

China Watch:

  • Kevin Rudd on China reforms (Caixing)
  • 50 million empty homes in China (SCMP)
  • China and Myanmar approve port project (Caixing)
  • Four reasons to manage China’s rise  (Lowy)
  • The reforms China needs (Project Syndicate)
  • China’s Eastern Europe push (WSJ)

China Technology Watch

  • Tencent’s social responsibility drive (WSJ) (SCMP)
  • China’s giant transmission grid (Tech Review)
  • AI will develop under two separate spheres of influence (SCMP

Brazil Watch

  • The rise of evangelicals in Latin America (AQ)
  • Brazil’s new foreign minister says climate chnage is a marxist plot (The Guardian)
  • Brazil’s new finance tsar (Bloomberg)
  • President Cardoso’s speech at the Wilson Institute (Wilson Center)
  • Brazil may move embassy to Jerusalem (WSJ

EM Investor Watch

  • Mexico’s challenge with investors (FT)
  • Russia’s de-dollarization strategy (WSJ)
  • Africa’s overlooked business revolution (McKinsey)
  • Timing the EM cycle (Seeking Alpha)
  • The age of disruption, Latin America;s challenges (Wilson Center)
  • Rwanda, poster child for development (WSJ)

Tech Watch

  • Pathways for inclusive growth (BSG)
  • Paraguay is a bitcoin powerhouse (The Guardian)

Investing