Doing Business in Brazil – It’s Like Waiting in Line at the DMV
If you were given the choice, what would you rather do: (1) Start a business in S?o Paulo, Brazil’s economic capital, or (2) Wait in a thirty day line at the Department of Motor Vehicles in Washington DC? Although number 2 sounds tempting, I would suspect that most everyone would opt to start a business in S?o Paulo. But don?t make up your mind just yet; there is reason to believe that waiting in line at the DMV is actually the better choice. According to a report released by the World Bank on Wednesday, it takes a staggering 152 days to start a business in S?o Paulo. That is, to get the proper authorization from local, state, and federal authorities, you need upwards of five months and a whole lot of patience. In S?o Paulo, bureaucracy is thick?in fact, it’s so thick that it makes the DMV look like the essence of efficiency.
The World Bank’s report, Doing Business in Brazil, analyzes the business climates in 13 Brazilian municipalities and states, ranking them from best to worst. I must confess that I was surprised to see Manuas, a ?wild-west? boomtown in the state of Amazonas, at the top of the list. But after looking over the data more carefully, I noticed that Manaus is a duty free zone, which means that its businesses enjoy the lowest tax rates in the nation. The report notes that on average, Brazilian businesses in the surveyed cities have a tax burden of 147 %! Look out Taxachussetts, businesses in Brazil are actually required to pay more in taxes than they earn. In Rio de Janeiro, where taxes are highest, businesses that meet all of their financial obligations are obliged to pay more than double their gross profit!Of course, no business actually follows the law and pays the required amount of taxes. How could they? As the report notes, ?The high cost of doing business fosters informality, a serious problem in Brazil.? What is informality? Well, for one thing, informality refers to the employee dress code at the DMV. But more importantly, it refers to the underworld of unsanctioned businesses whose owners have opted out of the formal economy because it is too difficult and expensive to meet legal requirements. From an economic perspective, informality is a bad thing because it depletes the state of tax revenue and makes it more difficult for businesses to get credit and access utilities. These in turn limit a business’s ability to expand and prosper, keeping millions mired in poverty. The report estimates that during 2002 and 2003, a whopping 42% of economic activity in Brazil took place in the informal economy.
So what’s the solution? It’s plain and simple, but unlikely to happen anytime soon: Brazil must cut the red tape. Simplifying the tax code, eliminating unnecessary steps to registering property, and reducing the time needed to enforce contracts are several necessary steps for creating a better business environment. Until these steps are taken, chilling at the DMV might actually be more productive than trying to start a legally recognized business in S?o Paulo. That is, assuming that you can?t afford the bribe.