Brazil's Industry Titans Worry They Can't Compete

The meeting between Brazilian President Dilma Rousseff and 28 business leaders on March 22 was a heavyweight encounter.

The president faced off with Brazil's most powerful retailers, bankers and industrialists -- who between them represented 12 percent of the country’s gross domestic product, the Folha de Sao Paulo newspaper reported.

Brazil’s captains of industry had come to deliver a somber message, one increasingly heard around Brazil: Domestic industry is losing the battle to cheaper imports. It simply isn’t competitive enough.

The Estado de Sao Paulo newspaper reported March 25 that the cost of producing a car in Brazil was the same as building one in the U.S. -- about $1,400, compared with $600 in Mexico. The growing masses of Brazilian car buyers are turning to imports. The next day, the Folha de Sao Paulo cited a study showing that vehicle sales had grown 6.1 percent in 2011, while production fell 5.2 percent. Sales of textiles, garments and footwear, it said, had risen 3.2 percent as production declined almost 11 percent.

The news came on top of figures released in January showing a decline of 2.1 percent in industrial production and a significant slowing in economic growth last year -- yet more bad news the government didn't want to hear.

Most Brazilian industrialists agree on the causes of these problems: a strong currency and expensive energy bills, as well as high taxes and labor costs. Viable solutions, however, seem to be in short supply.

After the big meeting, Rousseff instructed Finance Minister Guido Mantega to take action. On March 25, Mantega announced the government would extend sales-tax reductions on appliances for another three months, and enact new tax breaks on furniture and flooring products. More such measures, including a payroll-tax reduction, are expected next week.

But will they be enough?

Sergio Leo, a reporter for the Valor Economico business daily, said that Rousseff's meeting was really intended to spur investment. Currently, investments amount to almost 21 percent of GDP, the ISTOE Dinheiro magazine reported. The government would like to raise the investment rate to 24 percent of GDP. Leo wrote:

The explicit intention of the meeting was to encourage businessmen to maintain and expand their investment plans, giving guarantees that the government has, yes, a long-term plan and commitment to confront the major obstacles to competitiveness in Brazil and its companies.

Journalist Reinaldo Azevedo, writing on his Veja magazine blog, pointed out that Rousseff’s government already had 40 measures under way or being analyzed to deal with lack of competitiveness:

The effort ranges from comprehensive measures such as foreign-exchange intervention, increased enforcement at ports and preference for national products in biddings, to surcharges on specific products, an increase in import taxes and the renegotiation of an automobile deal with Mexico.

But the word that both Azevedo and Leo used to refer to such measures was "pontuais" -- or punctual. In recent years, the word (also rendered "pontual") has been adapted to mean an isolated event, something topical, of limited effective reach. That's exactly what both reporters -- and many Brazilian businessmen -- think of the government's measures.

Leo called initiatives like the exemption of sales tax on appliances “pontual and insufficient."

Azevedo added: “Brazilian protectionism leads to apprehension in its business partners, but businessmen complain that the measures are pontuais and don’t really solve the problem."

What business leaders want instead, wrote Leo, is something more far-reaching: major reform to Brazil’s cumbersome tax regime.

If there was a striking consensus, it was the conducting of fiscal policy. Businessmen see the complex, bureaucratic and oppressive tax regime as a major barrier to investment decisions and the survival of companies ... The commitment to quarterly meetings with the businessmen will oblige the government to be bolder, if it doesn’t want to transform the meetings into embarrassing sessions of outbursts from the private sector.

On March 27, writing in the Estado de Sao Paulo, Rubens Barbosa, a former Brazilian ambassador to the U.K. and the U.S. who is now a business consultant, suggested bigger solutions to stay competitive. He said measures such as tax reform, expanded access to credit, new ideas to reduce energy costs, improved customs efficiency and  infrastructure improvements were all needed. He added:

The recovery of industry depends on broader measures, which involve solutions for the high costs of taxation, of energy and of bank interest rates, and not of more protectionism from the government. The international scenario -- which for many years will be affected by the economic and financial crisis threatening global growth and international trade, and by China aggressively competing with Brazilian products abroad and even in the domestic market -- cries out for a political effort to significantly reduce Brazil's cost.

The government hopes that temporary tax breaks and other such measures can heal the wounds in Brazil's economy. But for many industrialists, they’re a sticking plaster, not a cure.

(Dom Phillips is the Rio de Janeiro correspondent for World View. The opinions expressed are his own.)

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