Brazil's Government Aims to Cut the 'Brazil Cost'

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By Mayara Vilas Boas

The high cost of doing business in Brazil is a longstanding complaint among, well, pretty much anyone who does business in Brazil. Now the government is trying to chip away at one piece of the so-called Brazil cost: electricity rates that rank among the highest in the world.

In April, Alcoa Inc., one of the world's largest producers of aluminum, said it was considering closing factories in Brazil because of its high electricity costs. It's not hard to see why. According to a report by the Getulio Vargas Foundation, "It’s not just the fact that at US$180 per megawatt hour Brazil’s electricity rate is the world’s third most expensive (after Italy and Slovakia). It’s that the government pulls out a disproportionate amount in taxes and fees."

To her credit, President Dilma Rousseff has made cutting these electricity costs one of her top priorities. According to an article in the business daily Valor Economico on June 25, Rousseff plans to press Brazilian states to reduce the ICMS, a local tax for goods and services and a major component in the cost of electricity. Federal and state taxes account for about 45 percent of the average electricity bill, while electric power makes up about 35 percent of the total cost of production in Brazil.

The need to make Brazilian industry more competitive has grown more pressing amid a broader economic slowdown. Brazil's economy expanded just 0.8 percent in the first quarter, and analysts have cut their 2012 growth estimate to 1.9 percent, the lowest in three years.

Rousseff's government, which in the past routinely blamed foreign monetary policy and the European debt crisis for Brazil's lackluster growth, has also finally started to implement policies to lower interest rates, provide tax breaks on certain consumer goods and check the appreciation of the currency, which had hurt Brazil's exports.

So far this year, the real has declined almost 9 percent against the dollar. Lowering the "Brazil cost," which includes the added expenses of excessive red tape and widespread bribery, will be Rousseff's next challenge. Maybe she is starting to understand that growth shouldn't be taken for granted and that the slowing economy can't be blamed on the exchange rate or the European debt crisis, but on the high cost of doing business in the sixth largest economy in the world.

(Mayara Vilas Boas is on the staff of Bloomberg View. Follow her on Twitter.)

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-0- Jul/26/2012 13:56 GMT