BY OTAVIANO CANUTO | NOVEMBER 27, 2018 | americasquarterly.org
Recent reforms have helped improve Brazil’s business environment. Further changes could do away with the “Brazil cost” once and for all.
Is it finally getting easier to do business in Brazil? Judging from the country’s rise from 125th to 109th in this year’s World Bank Doing Business report, there are clearly signs of progress. Recent reforms – for example in the kind of information that is made available to creditors – are partly responsible for Brazil’s jump in the rankings. But there is much more to be done: Brazil needs further reform if it is to shake its reputation as one of Latin America’s most frustrating business climates.
The World Bank’s report compares the times and costs that a typical company in a given country is forced to deal with throughout its life cycle. The quality of the business environment in a country is among the determinants of economic growth, as an unfavorable business environment negatively affects productivity and external competitiveness.
Despite improvement, Brazil’s absolute distance from the “efficiency frontier” – a baseline level indicating best practices in several categories – remains large.
An obvious place to start with additional reform is the tax system, whose complexity makes fulfilling even basic obligations a challenge. Here, Brazil ranks 184th out of 190 in the World Bank report. Reducing high barriers to trade with foreign countries would also help increase productivity and growth.
Brazil has taken steps to improve its credit market, but here too there is a chance for more progress. In addition to the newly approved electronic receivables registry, Congressional approval of a “positive credit registry,” similar to a consumer credit rating system, would have a positive effect on risk assessment and bank spreads. A new bankruptcy bill is also on the agenda, which would complement the truncated reform that was approved in the first half of the last decade.
Widening the space for greater competition in credit options for consumers, including via fintechs, would also help improve access to finance. Facilitating such access on a sustainable basis and not depending on public sector favors would not only improve the business environment, but also strengthen foundations for higher economic growth.
Research by the International Monetary Fund’s Nina Biljanovska and Damiano Sandri, released last month, examines the types of structural reforms that would have a positive effect on productivity and overall Brazilian economic growth. Their results point to reforms in the banking sector as those with maximum potential of results, in addition to having the highest likelihood of popular support.
Much has already been done, such as shrinking state intervention in credit allocation and the presence of large public banks. There is still room to reduce costs and risks in financial operations between private agents.
The World Bank’s report has indicated, year after year, how typical Brazilian companies are forced to spend human and material resources on activities that do not generate value. This subtracts from the use of productive resources in the economy as a whole. But there has been significant progress in some areas. In addition to reforms on credit information, registration and online licensing for companies has reduced the costs of starting a business in São Paulo and Rio de Janeiro. Digital origin certificates have made the process of importing goods faster, and investments in smart electricity grids have improved reliability in São Paulo.
Indeed, Brazil’s rise in the rankings could have been even bigger, if not for other countries’ own improvements in reducing inefficiencies. Of course, improving the business environment should be the goal in itself: Ranking positions are a consequence of a country’s relative situation with respect to indicators monitored by the Doing Business report, while the absolute level of inefficiency is what affects a country’s productivity.
Continued commitment to a reform agenda would further improve Brazil’s business environment. Regardless of its rankings in “Doing Business” reports, productivity and economic growth in Brazil would be the greatest beneficiaries.