BRAZIL TRAILS IN WORLD BANK'S "DOING BUSINESS" RANKINGS

UNCLAS SECTION 01 OF 02 SAO PAULO 000685 SIPDIS DEPT FOR WHA/BSC, WHA/EPSC, EB/IFD STATE PASS TO USTR FOR MSULLIVAN STATE PASS EXIMBANK STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE NSC FOR SUE CRONIN USDOC FOR 4332/ITA/MAC/OLAC USDOC FOR 3134/USFCS/OIO TREASURY FOR OASIA, DAS LEE AND FPARODI DOL FOR ILAB MMITTELHAUSER SOUTHCOM ALSO FOR POLAD SIPDIS E.O. 12958: N/A TAGS: ECON EINV PGOV ETRD BR SUBJECT: BRAZIL TRAILS IN WORLD BANK'S "DOING BUSINESS" RANKINGS ¶1. SUMMARY: Brazil ranked 119th among 155 countries in the International Finance Corporation's (IFC) Doing Business rankings, published by the World Bank. Brazil fared worst in its labor, tax, and bankruptcy rankings. Unless addressed, doing business in Brazil may be viewed more in terms of its costs, than its benefits. END SUMMARY. UN-DOING BUSINESS? -------------- ¶2. UNFLATTERING FIGURES: Concerned about their performance in comparison to India, China, and other large developing countries, many Brazilians were surprised that the IFC study showed Brazil as more corrupt than China, and its judicial system as worse than India's. The report warned that corruption, the onerous tax burden, and high interest rates were the main obstacles to Brazilian development. Brazil ranked very poorly in its labor, tax, and bankruptcy practices. WHAT THE NUMBERS SAY -------------- ¶3. THE IFC TOP TEN: The IFC's Doing Business Ranking evaluated ten indicators and compared Brazil's results with the average performances of Latin America (LA) and members of the Organization of Economic Cooperation and Development (OECD). -- STARTING UP A BUSINESS (RANKED 98/155): Entrepreneurs in Brazil can expect to go through 17 steps to launch a business over 152 days on average, compared to an average of 63 days among LA countries, and an average of 19 days in OECD countries. -- DEALING WITH LICENSES (RANKED 115/155): In Brazil it takes 19 steps and 460 days to complete the licensing process (LA countries average 206 days, OECD average 146),at a cost of 184.4 percent of income per capita. -- HIRING AND FIRING WORKERS (RANKED 144/155): Brazil is heavily criticized in terms of difficulty of hiring, difficulty of firing, rigidity of employment, hiring cost, and firing costs. Firing costs (measured in weekly salaries) averaged 63 salaries in LA and 35 salaries in OECD countries, whereas in Brazil, the cost of firing an employee is a mammoth 165 weekly salaries. -- REGISTERING PROPERTY (RANKED 105/155): In Brazil, it takes 15 steps (compared to seven in LA countries and five in OECD countries) and 47 days to register property. The cost to register property is four percent of overall property value. -- ACCESS TO CREDIT (RANKED 80/155): Brazil is heavily criticized for policies that inadequately restrict access to credit. [NOTE: Real interest rates in Brazil are currently above 10 percent, among the highest in the world. END NOTE.] -- PROTECTING INVESTORS (RANKED 53/155): Brazil is criticized for inadequate transparency of transactions (extent of disclosure), liability for self-dealing, shareholders' ability to sue officers and directors for misconduct, and weak investor protection laws. -- PAYING TAXES (RANKED 140/155): Entrepreneurs in Brazil must make 23 payments (versus 16 in OECD countries),spend 2,600 hours of tax-related preparation (compared with 530 hours in LA countries and 197 in OECD countries),and pay 147.9 percent of gross profit in taxes (compared with 52 percent in LA countries and 45 percent in SAO PAULO 00000685 002 OF 002 OECD countries). -- TRADING ACROSS BORDERS (RANKED 107/155): Brazil is criticized for its cumbersome import and export procedures. For example, 16 signatures are needed to import merchandise (versus three in OECD countries),and importation takes an average 43 days to process (versus 14 days in OECD countries). -- ENFORCING CONTRACTS (RANKED 70/155): It takes 24 steps and 546 days to enforce contracts in Brazil. The cost of enforcing contracts is 15.5 percent of debt. -- CLOSING A BUSINESS (RANKED 141/155): In Brazil, it takes 10 years on average to close a business (compared to 3 years in LA countries and 1 in OECD countries) at a cost of 9 percent of the estate value. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from an insolvent firm, is 0.49 percent, less than a measly half cent per dollar (compared with 28 cents per dollar in LA countries and 74 cents per dollar in OECD countries). COMMENT -------------- ¶4. "O CUSTO BRASIL:" Taken together, these factors are frequently referred to as the "custo Brasil" or Brazil cost. Sadly, these factors do more than merely complicate doing business in Brazil, they are also frequently cited as the key factors stifling GDP and investment growth retarding competitiveness, and discouraging foreign direct investment. Brazilian business leaders, economic analysts and some government figures worry that failure to reduce the "custo Brasil" will mean a loss of markets and investment to India and China, which are posting consistent gains in exports, GDP growth, and FDI. END COMMENT. ¶5. This cable was coordinated/cleared with Embassy Brasilia. MCMULLEN