ECONOMY-BRAZIL: Business and Investment Strangled by Red Tape

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Oct 15 2004 (IPS) - Is the developing South destined to suffocate in excessive red tape? Does government regulation aid or impede development?

These are questions that emerge from a recent World Bank Report, entitled “Doing Business in 2005”, which compares the difficulties in doing business in 145 different countries, ranging from the most to the least developed.

In Brazil, starting a business involves 17 regulatory requirements that take an average of 152 days. In this regard, Brazil is only surpassed by Haiti – the country in Latin America and the Caribbean with the longest delay, averaging 203 days – along with Laos and a number of sub-Saharan African countries.

The fact that the two regions in the world with the longest delays for starting a business are Latin America/Caribbean, averaging 70 days, and sub-Saharan Africa, at 63 days, points to a direct correlation between poverty and excessive bureaucracy.

In the countries with the highest per capita income in the Organisation for Economic Cooperation and Development (OECD, made up of the 30 most developed nations), roughly 25 days and six regulatory procedures are needed to get a new business going, on average. In Australia, Canada, Denmark and the United States, the process takes a mere two to five days.

But “If opening a business in Brazil is hard, closing one is almost impossible,” accountant Ivan Salles told IPS. This problem has even been acknowledged by Brazilian government authorities, like the former president of the Central Bank, Arminio Fraga. “I’ve already spent 11 years trying to close a business for one of my clients.”

That’s one year longer than the 10-year average cited by the World Bank report for closing a business in Brazil – which is already three times longer than the average for the rest of Latin America.

Enforcing a business contract is another process that seems to take a lifetime in Brazil. An average of 556 days must be spent on 25 different regulatory procedures to get paid, at a cost of 15.5 percent of the money recovered. Difficulties like these create an unfavourable climate for investment, which hinders development.

Another recent World Bank publication, the “World Development Report 2005: A Better Investment Climate for Everyone”, based on surveys conducted in 53 developing countries, reinforces the classification of Brazil as an “excessively bureaucratic” country, something that makes it particularly prone to corruption, another major problem.

Surveys carried out in 1,642 Brazilian companies revealed that 76 percent of the entrepreneurs consulted were unhappy with the instability of rules and regulations, 84.5 percent felt they paid too much in taxes, 71.7 percent said sources of financing were insufficient, and 67.2 percent complained of corruption.

The case of Brazil stands out because it is one of the most highly developed countries of the South, whose poverty is a product of unequal distribution of wealth, as opposed to a weak economy. It is also renowned for its rigid, complicated and oversized bureaucracy, described by many as “Byzantine”.

Remarkably enough, there was an actual Ministry of Debureacratisation in Brazil between the years 1979 and 1983. The minister was the late Helio Beltrao, who implemented a “national programme against useless bureaucracy” and became a symbol of this fight.

But once the early-1980s push to reduce excessive bureaucracy had passed, the complex web of rules, regulations and red tape grew even wider and tighter.

In 1999, the former coordinator of the national debureaucratisation programme, Joao Piquet Carneiro, founded the Helio Beltrao Institute, with the aim of reviving the efforts and ideals of the late minister.

“We regressed to a situation where citizens are essentially slaves to government bureaucracy,” said Carneiro, who pointed to the reestablishment of a large number of regulatory procedures that had been eliminated before 1985.

Carneiro blamed this setback on the fiscal adjustments that successive administrations have made over the last decade in the attempt to balance the budget, which has exacerbated the traditionally high degree of centralisation and control. The need to increase revenues led to higher and more complex taxes, and therefore more bureaucracy to oversee an “anti-democratic taxation policy,” he said.

For his part, Salles commented that the computerisation of public services, which should speed them up, has led to even longer delays and more rigid requirements in some cases. But the process has also led to some advances, since the legal registration of a company can now be carried out in roughly 60 days, if all the paperwork is in order, he said.

Tax requirements “are the worst,” explained the accountant, because multiple declarations are needed to meet the requisites set at the different levels of government – local, state and federal – which all have their own legislation to fulfil.

Corruption is not the only by-product of this excess of red tape, which has contributed to the growth of the informal economy. Brazilians are generally considered highly enterprising, continually starting up new businesses. However, the majority are never legalised, and simply continue to operate outside the law.

For 10 years now, Angelina Dutra has run an informal clothing business from a shop built in the yard behind her house in Belo Horizonte, the capital of the eastern Brazilian state of Minas Gerais. Two years ago, she began the process of legalising the business, but because one of the shop’s windows opens into the house, she has not been able to obtain one of the permits required.

“My accountant consoled me by telling me that any fines I might have to pay would still be less than what I would have to pay in taxes if the business was legal,” she told IPS.

The government of President Luis Inácio Lula da Silva, a former trade unionist, is now trying to make it easier for small businesses in the informal sector to become legal, by simplifying and reducing the taxes they are required to pay, particularly for businesses that take in less than 36,000 reals (around 12,500 dollars) a year.

But without an accompanying reduction in bureaucracy, the success of these measures is thrown into doubt.