Abstract
Selected Issues
Brazil’s Business Environment and External Competitiveness1
This chapter provides an overview of competitiveness challenges in Brazil and identifies policies to improve competitiveness; it documents the impact of reforms on competitiveness using the parameters from existing empirical and quantitative studies, and reports on priority areas in need of reform flagged by the World Bank’s Ease of Doing Business (DB) assessment. The analysis underscores the importance of reducing tariffs as well as non-tariff barriers. Lower tariffs on capital goods, greater integration into global value chains, more flexible labor, product and financial markets, and lighter procedures to pay taxes and obtain business permits are important for improving the external competitiveness.
A. Ease of Doing Business
1. Brazil’s position in the World Bank DB ranking is disappointing, but has improved marginally since 2010. In 2017, Brazil ranked 123rd in a total of 190 states on which data were collected. Brazil’s 2017 ranking is better compared to 2010, when it occupied rank 129 in a sample of 183 countries. However, Brazil’s ranking fell slightly compared to its position in the previous survey as the country failed to keep up with reforms in the rest of the world. Between 2015 and 2016, 137 economies worldwide implemented 283 business regulatory reforms. This represents an increase of more than 20 percent compared to the previous year (Doing Business report, 2017).2
2. Brazil shows weaknesses across several categories of Ease of Doing Business indicators. The procedures to start a business, obtain construction permits, pay taxes, and trade across borders, are uncommonly cumbersome. Slow progress on these issues over time has put Brazil below its peers in terms of business’ attractiveness relative to countries that have meanwhile implemented reforms in many areas. Brazil does better in comparisons related to getting electricity, enforcing contracts, resolving insolvency and protecting minority rights.
Brazil: Doing Business Indicators, 2017
(Ranking)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Brazil: Doing Business Indicators, 2017
(Ranking)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Brazil: Doing Business Indicators, 2017
(Ranking)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
3. Looking across subcomponents of the overall score, Brazil’s global business attractiveness improved in some areas but is overall weaker than the LAC average. To facilitate comparison across time, made difficult by changes in methodologies3, the DB database includes a measure called “distance to frontier” (DTF) which measures performance as the deviation of a country from the best performer. The DTF score ranges from 0 to 100, with 0 representing the worst performer and 100 the frontier.4 Brazil’s DTF has been overall stable, with some improvement in recent years, notably in the areas of insolvency procedures, contract enforcement, and minority investor protection. Starting a business is also easier now, albeit still more complicated than elsewhere in the region. In a few areas, such as trading across borders, Brazil moved away from the frontier. In terms of the overall business environment, the largest five countries in the region (excluding Brazil), the LA5, are much closer to the frontier than Brazil.
Brazil: Doing Business Rankings
(Index from 0 to 100, where 0=lowest, 100=best)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: Doing Business, The World Bank.Brazil: Doing Business Rankings
(Index from 0 to 100, where 0=lowest, 100=best)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: Doing Business, The World Bank.Brazil: Doing Business Rankings
(Index from 0 to 100, where 0=lowest, 100=best)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: Doing Business, The World Bank.Brazil: Changing Distance to Frontier, 2010–17 Comparison
Brazil: Changing Distance to Frontier, 2010–17 Comparison
| 2017 | 2010–2017 | ||||
|---|---|---|---|---|---|
| Rank | DF | Below Latam | Worsening | Improvement | |
| Overall | 123 | 56.5 | x | x | |
| Starting a business | 175 | 65.0 | x | ||
| Resolving insolvency | 67 | 49.2 | |||
| Dealing with construction permits | 172 | 51.3 | x | ||
| Paying taxes | 181 | 33.0 | x | x | |
| Trading across borders | 149 | 55.6 | x | x | |
| Getting electricity | 47 | 81.2 | x | ||
| Registering property | 128 | 52.6 | x | ||
| Enforcing contracts | 37 | 67.4 | x | ||
| Protecting minority investors | 32 | 65.0 | x | ||
| Getting credit | 101 | 45.0 | |||
Brazil: Changing Distance to Frontier, 2010–17 Comparison
| 2017 | 2010–2017 | ||||
|---|---|---|---|---|---|
| Rank | DF | Below Latam | Worsening | Improvement | |
| Overall | 123 | 56.5 | x | x | |
| Starting a business | 175 | 65.0 | x | ||
| Resolving insolvency | 67 | 49.2 | |||
| Dealing with construction permits | 172 | 51.3 | x | ||
| Paying taxes | 181 | 33.0 | x | x | |
| Trading across borders | 149 | 55.6 | x | x | |
| Getting electricity | 47 | 81.2 | x | ||
| Registering property | 128 | 52.6 | x | ||
| Enforcing contracts | 37 | 67.4 | x | ||
| Protecting minority investors | 32 | 65.0 | x | ||
| Getting credit | 101 | 45.0 | |||
Brazil: Ease of Doing Business–Distance to Frontier
(Index, 0–100, higher is better)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: Doing Business, The World Bank.Brazil: Ease of Doing Business–Distance to Frontier
(Index, 0–100, higher is better)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: Doing Business, The World Bank.Brazil: Ease of Doing Business–Distance to Frontier
(Index, 0–100, higher is better)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: Doing Business, The World Bank.4. Ease of doing business in Brazil is low relative to Brazil’s income. Plotted against per capita GDP in 2015, Brazil’s DTF appears too low (Brazil’s index would have to move from the current 56 to 65 percent to approach the fitted line. Such an improvement would be difficult to achieve over a short period. In the latest DB, Kazakhstan was among the countries that increased the most its DTF in one year owing to reforms across seven dimensions of the index; still, the improvement was less than 5 percentage points.
5. What makes Brazil’s position weak?
Starting a business is a cumbersome process in Brazil. An estimated 11 procedures (down from 14 in 2010) and about 80 hours are necessary to start a business. Although some improvement was achieved over the years in this dimension, Brazil scores relatively low compared to the average in Latin America.
Paying taxes. It takes 2038 hours a year for a firm to pay taxes in Brazil, an absolute maximum in the sample. This number fell from 2600 in 2010, a large improvement, but still insufficient considering this is double the time it takes to pay taxes in the second less efficient country according to this measure in Latin America, Bolivia. The reduction compliance time in Brazil was the result of electronic systems that were introduced some years ago resulting in more efficient tax compliance processes. However, although the time to pay taxes fell, the share of total taxes and contributions in pre-tax profits increased and it is estimated at slightly below 70 percent. The incidence of taxes in profits is only 30 percent in Chile, for instance.5 OECD (2015) points to the fragmented and inefficient indirect tax system as one of the important contributors to the “Brazil cost.” Tax credits for intermediate inputs are allowed only when they are embodied in the final good sold. The burden of proof regarding how much of an input goes directly into the final products lies with taxpayers, resulting in extensive use of tax accountants and frequent lawsuits over disputes.
Tax rates and tax regulations, alongside corruption and inefficient bureaucracy, have been identified as the most problematic factors for doing business in Brazil in the 2015 World Economic Forum’s survey.6
Among its political risk index components, the International Country Risk Guide (ICRG) shows a low score—2 out of 6—on corruption (indicating high level of “potential corruption in the form of excessive patronage, nepotism, job reservations, ‘favor-for favors’, secret party funding, and suspiciously close ties between politics and business”) and a low score on the quality of bureaucracy—2 out of 4—intended as freedom from political interference and interruption of government services. While these issues affect the operation of the government more directly, they tend to have repercussion on the business environment given that the public sector is a large customer, especially in the services industry in Brazil. Moreover, low trust in policies and corruption can make private sector less forward-looking and hamper accumulation of physical as well as human capital, constraining productivity gains.
Trading across borders. Brazil occupies a very low rank of 149 in this indicator. DB records the time and cost associated with the logistical process of exporting and importing goods.7 Brazil’s border compliance and import/export costs are among the highest in the world. It takes more than 5 days to acquire customs clearance and inspections for exporting from Brazil, and more than 15 days to clear imports, which is slower than for most of the countries in the world.
Getting credit. Brazil occupies rank 101 in this indicator. Credit information is deep and Brazil’s credit bureau coverage per adult is high, but the credit registry can be strengthened. Legal rights are also an area that calls for improvement.
Insolvency. The insolvency framework has improved, but recovery rates below 16 percent of the value, are particularly low, and time to conclude the process (4 years on average) is long.
Brazil: Doing Business and Per Capita GDP
(In logs)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: DOB, WDI; and IMF staff estimates.Brazil: Doing Business and Per Capita GDP
(In logs)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: DOB, WDI; and IMF staff estimates.Brazil: Doing Business and Per Capita GDP
(In logs)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: DOB, WDI; and IMF staff estimates.
Brazil: Most Problematic Factors for Doing Business (2015)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum’s Executive Opinion Survey.Brazil: Most Problematic Factors for Doing Business (2015)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum’s Executive Opinion Survey.Brazil: Most Problematic Factors for Doing Business (2015)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum’s Executive Opinion Survey.
Bureaucracy Quality
(Index: max=4)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: International Country Risk Guide.Bureaucracy Quality
(Index: max=4)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: International Country Risk Guide.Bureaucracy Quality
(Index: max=4)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: International Country Risk Guide.
Corruption
(Index: max=6)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Corruption
(Index: max=6)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Corruption
(Index: max=6)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Institution Related GCI Scores (2016–17)
Part I
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.Institution Related GCI Scores (2016–17)
Part I
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.Institution Related GCI Scores (2016–17)
Part I
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.
Institution Related GCI Scores (2016–17)
Part II
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.Institution Related GCI Scores (2016–17)
Part II
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.Institution Related GCI Scores (2016–17)
Part II
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Economic Forum.B. Recent Reforms Affecting the DB Score
6. Brazil’s business environment has changed over the past decade. While many changes were positive, some worsened its position in international rankings. Some important changes in the policy environment, such as the expanded presence of public banks and the increased state intervention in the electricity and other key sectors, however, are not necessarily reflected in the list below, which corresponds to the standard criteria used in DB.
Starting a business. In 2016, an online portal for processing business licenses was launched in Rio de Janeiro; although the opening hours of the Rio de Janeiro business registry were reduced, the overall effect should be positive. Improvements in the synchronization between federal and state-level tax authorities took place between 2009 and 2010.
Paying taxes. Paying taxes became less costly for companies with the repeal of the tax on check transactions in 2011.
Trading across borders. Over the past few years trading across borders has become easier thanks to an electronic system that reduced the time required for imports documentary compliance. Time for documentary and border compliance for exporting was also reduced by implementing the electronic SISCOMEX Portal system. These reforms came after a long period without upgrades as the last improvement in the electronic data interchange system before that took place in 2009.
Getting credit. Private credit bureaus have been allowed to collect and share positive information since 2011.
Enforcing contracts. Contract enforcement has been strengthened thanks to a new mediation law—that includes financial incentives for parties to attempt mediation—and a new code of civil procedure. In 2012, an electronic system for filing initial complaints was established at the São Paulo civil district court.
Registering property. In 2012, transferring property became more difficult with the requirement of a new certificate on good standing on labor debts, adding to the number of due diligence procedures. Moreover, in 2015, in the city of São Paulo increased the property transfer tax.
C. Announced Micro Reform Measures
7. The government has recently announced a package of micro measures seeking to improve the business climate by streamlining administration and reducing red tape. While some of these measures will not be captured directly in the DB indicators, they have the potential to improve economic efficiency and facilitate the opening of the country. The timeline for their implementation is short, but the effects may take some time to materialize. The package includes 47 actions directly linked to the Ministry of Industry, Foreign Trade and Services (MDIC), or to agencies under the ministry’s umbrella. Many measures—24 out of 47—are linked to foreign trade and consist of digitalization, computerization, and standardization of procedures.
Starting a business. A National Network for Registration Simplification and Leading of Business (Redesim) will accelerate opening of new companies by integrating cadasters with registries and licensing bodies.
Paying (and collecting) taxes. The government aims at simplifying procedures for tax refunds and the payment of labor and tax obligations. To that purpose an electronic collection system will be established (eSocial). The system currently only applies to taxes and contributions collected from domestic workers and will be extended to unify 13 different obligations. Electronic invoicing used by the states and municipalities, and accounting information provided to the Federal Revenue will be simplified and standardized.8 Moreover, the procedures undertaken by businesses to declare and submit tax-related documents will be streamlined. The reform of the overly complex Programa de Integra Integraçãoo Social (PIS)9 will simplify the definition of the tax base and thus reduce the currently high volume of litigation demands.
Trading across borders. The agenda includes numerous measures to streamline the steps involved in import/export activities. A Single Foreign Trade Portal accessible via internet will consolidate the required documents including digital certificates of origin, simplify trade processes and customs transit, lowering the number of days necessary to export (from 13 to 8 days) and import (from 17 to 10 days). Other measures range from simple changes—such as ending the need to register to access the MDIC’s official statistics online—to issues that affect the complex regime which grants exemption from import tariffs to exporters. Accreditation procedures for laboratories and organizations will be reviewed (Inmetro) and patent and brand registration procedures will also be standardized. Important efforts will be made to cut the waiting time for reviewing the annual reports of research and development projects which grant access to some tax breaks in the Manaus Tax Free Zone.
Labor productivity. Recently approved in Congress, the Migration Law allows concession of working visas for citizens of other countries who are in possession of higher education diplomas. This measure may open the labor market to competition and could alleviate to some extent the pressures on the demand for skills in Brazil.
Getting credit. Improvements will affect the positive credit registry and reduce informational asymmetry; a centralized market for electronic credit card and other receivables will be created; legislation for the fiduciary alienation of immovable property that goes to auction will be strengthened. Improvements of the Bankruptcy Law aim to empower creditors, promote extrajudicial recovery, streamline processes, and strengthen the rights of the acquirers of the company.
Other measures. The government has committed to implementing a broader set of measures affecting the labor market, the payment system, and some credit allocation mechanisms. An attempt is being made to coordinate a settlement of tax and social-security debts of companies; large companies’ debts to the Brazilian Development Bank (BNDES) under the Investment Support Program (PSI) are under renegotiation to support deleveraging and step up growth on new credit and activity; small and medium-sized companies’ debts are also being renegotiated. Other micro reforms include authorization for merchants to charge different prices for purchases paid in cash or with card; the reduction in the period for repayment and in the cost of revolving credit to the consumer, and the standardization of forms for commercial establishments.
D. External Competitiveness
8. Brazil’s external sector performance has deteriorated in recent years.10 Since the global financial crisis, investment, export growth and market efficiency have declined relative to peers. High unit labor costs, inadequate infrastructure (IMF Working Paper No. 15/180), elevated tariffs, and high rigidities in factor, goods, and financial markets have reduced openness and compressed Brazilian exporters’ shares in global markets. Export volumes performance no longer surpasses peers. Brazil witnessed strong export performance up to the global financial crisis,11 in the upper quartile of major EMs.12 However, following the crisis, its volume path has converged to the median of major EMs. This reflects, inter alia, ample swings in the REER during the 2000s―a large depreciation in the first half and appreciation thereafter, in sharp contrast with other EMs and LATAM countries. (That said, export volumes in some EMs, especially in Asia, may be inflated by reexports of goods because of their integration into global value chains.)
Export Volume (2000–15)
Goods and Services. Index: 2000=100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WEO.Export Volume (2000–15)
Goods and Services. Index: 2000=100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WEO.Export Volume (2000–15)
Goods and Services. Index: 2000=100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WEO.
Terms of Trade and REER (2000–16)
Emerging markets. Index: 2000 = 100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: INS and WEO.Terms of Trade and REER (2000–16)
Emerging markets. Index: 2000 = 100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: INS and WEO.Terms of Trade and REER (2000–16)
Emerging markets. Index: 2000 = 100
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: INS and WEO.
Export Diversification
(HH Index)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WITS.Export Diversification
(HH Index)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WITS.Export Diversification
(HH Index)
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: WITS.
Exports: Change in Domestic Value Added
Share in Major EMs
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: OECD and WTO.Exports: Change in Domestic Value Added
Share in Major EMs
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: OECD and WTO.Exports: Change in Domestic Value Added
Share in Major EMs
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Sources: OECD and WTO.9. Brazil’s exports are diversified,13 but this advantage appears to have diminished recently. The Herfindahl concentration index was in line with the EM median in 2014–15, up from lower levels registered over the past two decades. The domestic content of Brazil’s exports, based on value added trade data compiled by the OECD and WTO, has been persistently higher than its peers’ pointing to the weight of commodities in Brazilian exports and the country’s lower integration into global value chains.14 Brazil’s export quality, compiled by Henn et al. (2015),15 is well below average implied by the frontier of other major EMs and advanced economies (AMs).16
E. Factors Explaining Deteriorating Competitiveness
While aggregated macro indicators, such as export volumes, are common summary statistics, they may be affected by numerous factors. This suggests the analysis needs to be complemented by micro indicators.
10. As shown in other studies, trade liberalization appears to have stalled in Brazil after the large reduction in tariffs in the early 1990s. Tariffs in Brazil are higher than in its peers, despite efforts to liberalize trade since the early 1990s (Box 1). While import tariffs in Brazil have declined since the early 1990s to below 10 percent, Brazil’s tariff regime is currently more protectionist than the average in Latin America and the Caribbean (LAC) and the upper middle income country average. Disaggregated data suggests that goods and other raw materials tariffs are substantially higher than Brazil’s peers’, especially on capital goods.
History of Trade Liberalization in Brazil
By the late 1980s, Brazil’s import policy exhibited the following basic characteristics (Cardoso 2009):
Tariff structure was still largely the same as in 1957.
Generalized presence of tariffs with redundant quotas.
Various additional taxes, such as financial transaction tax, port improvement tax, and additional tax for renewal of maritime transportation.
Ample use of Non-Tariff Barriers (NTBs), such as a list of products with suspended import licenses, specific advance authorization for certain products (steel and IT products) and annual corporate import quotas. Cardoso (2009) estimated that tobacco, real estate, plastic products, clothing, footwear and textile products, perfumes, soap and candles, and transport material were most protected by the barriers in 1987.
The existence of 42 special regimes, allowing for the exemption or reduction of taxes.
Liberalization occurred during the early 1990s. Trade liberalization, including the three tariff reduction waves, was implemented during 1988 and 1994. In the first phase (1998–89), two tariff reforms were undertaken seeking to eliminate the redundant share of the nominal tariff without significantly impacting import volumes. The second phase (1991–93), gradual import tariff reductions, was implemented after NTBs were abolished in 1990, with imports being controlled through import tariffs. The third phase (1994) intended to discipline domestic prices through greater external competition. In response to these measure, and alongside measures taken in 1994 to facilitate the implementation of a stabilization plan (the Real Plan), the weighted-average tariff declined substantially.
Brazil, Tariff Rates (1990-Latest)
Weighted average, percent
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Integrate Trade Solution (WITS).Brazil, Tariff Rates (1990-Latest)
Weighted average, percent
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Integrate Trade Solution (WITS).Brazil, Tariff Rates (1990-Latest)
Weighted average, percent
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: World Integrate Trade Solution (WITS).But there was a partial reversal thereafter. The liberalization during the first half of the 1990s, however, soon gave way to a reversal as Brazil entered a period of increasing current account deficits driven by a severe exchange rate appreciation and negative external shocks (Moreira 2009). In November of 1997, the government temporarily raised the tariffs by 3 percentage points. After that, the weighted average of tariff rates demonstrated a very gradual decline until the global financial crisis, and gradually increased since then. De Araujo Jr. (2017) pointed that frequent use of anti-dumping, especially after 2008, has contributed to eroding competitiveness by keeping domestic prices high and reducing competition in domestic markets.
The literature identifies a positive link between trade liberalization and productivity. Lopez-Córdova and Moreira (2004) reported that the trade liberalization of the first half of the 1990s made a substantial contribution to lowering prices of capital goods in Brazil, estimating that a 10 percent reduction in tariffs increases total factor productivity (TFP) by 1 percent. Lisboa et al. (2010) used firm-level data and found that the reductions of tariffs on inputs were important in explaining productivity growth during trade liberalization in Brazil. Tariff reduction in products that are mainly used as inputs affect productivity growth.
11. Investment in Brazil has been weaker than in its peers. Investment shows some correlation to tariffs on capital goods across countries. Because weak investment relative to peers was persistent in Brazil, the quality of its capital stock has deteriorated. The slow growth and the aging of the capital stock has constrained marginal productivity of labor, limiting its growth potential.
Brazil: Investment and Tariffs: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Brazil: Investment and Tariffs: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Brazil: Investment and Tariffs: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
12. Non-tariff measures are used extensively in Brazil. Quotas and special safeguards are more common in Brazil than in LAC countries on average (Cardoso 2009). OECD (2014) finds that Brazil is second only to Indonesia in the number of local content requirements imposed since the global financial crisis. However, restrictions to inward FDI are close to peers. Brazil has fewer restrictions on FDI than Asian and European EMs, although its relative advantage appears having diminished recently. FDI has a role not only for the financing of current account deficits but also for transferring technology/stimulating productivity gains.
FDI Restrictiveness Index (1997–2015)
Higher number indicates more restrictive, average
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: OECD.FDI Restrictiveness Index (1997–2015)
Higher number indicates more restrictive, average
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: OECD.FDI Restrictiveness Index (1997–2015)
Higher number indicates more restrictive, average
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Source: OECD.
Global Competitiveness: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Global Competitiveness: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Global Competitiveness: Brazil and Emerging Markets
Citation: IMF Staff Country Reports 2017, 216; 10.5089/9781484309919.002.A002
Literature on the Impact of Trade Liberalization on Productivity and Growth
Theoretical literature points to several channels through which trade liberalization can boost productivity and external competitiveness (Ahn et al. 2016).
Competition. Lower trade and FDI barriers can strengthen competition in the liberalized sector(s), by putting pressure on domestic producers to lower price margins, exploit economies of scale, improve efficiency, absorb foreign technology, or innovate.
Scale. Productivity gains from liberalization may accrue disproportionately to larger and more productive firms, enabling them to gain market share and amplify aggregate gains within the liberalized sector.
Lower input costs. Trade liberalization, which includes local content requirements, can boost productivity by increasing the quality and variety of intermediate inputs available to domestic producers.
But higher productivity does not necessarily imply sustained higher growth. As demonstrated by Bajona et al. (2008), standard trade models—including Ricardian models, Heckscher-Ohlin models, monopolistic competition models with homogeneous firms, and monopolistic competition models with heterogeneous firms—at best predict that trade liberalization increases welfare, but does not necessarily sustain real GDP growth. Trade liberalization improves resource allocation, but the real income gains may be limited to the period during which trade liberalization occurs (Moreira 2004).
Sectoral and firm-specific factors are also important for growth. Mechanisms outside of those analyzed in standard trade models can help liberalization lead sustained higher growth. Recent theoretical and empirical evidence suggests that the impact of trade liberalization varies widely across firms, depending on their individual characteristics, such as ownership structure (foreign owned vs. domestic), the extent to which they use imported inputs, and the degree of competition in their industry (Ahn et al. 2016). Also, the treatment of the nontraded sector is important in determining the magnitude of liberalization’s effect on labor productivity (Kovak 2013). This suggests that interactions between trade liberalization and other policies, such as product and labor market regulation or barriers to FDI that could affect firm characteristics is important.
The degree of integration matters too. Also, the degree and quality of the integration, both in terms of trade-to-GDP ratios and the level and structure of protection, tend to have a major influence in the end results of trade liberalization (Moreira 2004). Gains from trade are maximized when a country not only opens its own market, but when it also enjoys access to markets abroad (Moreira 2009). Monfort (2008) summarizes that benefits from an FTA mostly stem from non-trade channels, including reduced risk premiums, increased foreign direct investment, or improved factor productivity, rather directly from trade. Beaton et al. (2017) employed a large panel data set to show that growth is positively affected by trade openness, trade partner diversification, integration to global value chains, and export quality. Hannan (2017) found that trade agreements in Latin America have generated substantial growth in exports, although the export gains in Latin America were more limited than the world average, possibly reflecting the region’s lower trade openness and weaker integration into global value chains.
Empirical, cross country studies have underscored gains in productivity and growth from trade liberalization (Goldberg et al., 2004). Wacziarg and Welch (2003) employed an event study approach using aggregate cross country data to find the robust positive effect of trade liberalization on growth. Ahn et al. (2016) used data of effective tariffs in 18 sectors across 18 advanced countries spanning over two decades and found a significant and robust impact of input tariff liberalization on sector-level total factor productivity (TFP)—a one percentage reduction in input tariffs raises TFP levels by about two percent. Krishna and Mitra (1998) investigated the effects on competition and productivity of the dramatic 1991 trade liberalization in India. Using firm-level data, they found (i) strong evidence of an increase in competition and (ii) some evidence of an increase in the growth rate of productivity.
Liberalization must be supported by other structural policies. Benefits of trade liberalization can be enhanced through coordinated measures to improve non-trade factors such as foreign investment, rigidities in labor and product markets, and global markets’ integration. OECD (2011) reported a substantial improvement in real GDP from a coordinated reduction in trade costs related to tariff and non-tariff barriers, but most of the improvement was driven by a decline in non-tariff barriers. Rahman et al. (2015) found a strong role of structural reforms for taking advantage of the tariff-free trade environment to export in new member states of EU. Especially, they reported that (i) policies that influence higher education and skills match, incentives to work, and foreign investment environment are most relevant and (ii) reform sequencing becomes important for export quality improvement.1 Also, Baniya (2017) found that timeliness of delivery of goods constitutes a comparative advantage of exports. IMF (2015) also showed that despite the positive effect of trade agreements on exports they need to be accompanied by structural reforms and reduction of non-tariff barriers.
1 A conducive environment for foreign investment and greater links with supply chains are key for countries at the lower end of quality spectrum, while tertiary education, skills upgrade, and R&D spending are priorities for countries at the medium-level of quality spectrum.F. Benefits of Furthering Trade Liberalization in Brazil
13. Trade protection should be reduced steadily by lowering tariffs, removing non-tariff barriers and scaling back local content requirements, including on public procurement. OECD’s extensive quantitative analysis on the impact of trade liberalization, as well as the work of other analysts, points to substantial gains from liberalization, if appropriately implemented. Lowering barriers to trade allows firms to use a higher share of foreign intermediate goods in production. Final goods are thus sold at lower prices, enhancing the competitiveness of Brazilian exports while also benefitting Brazilian households. In addition, lower barriers to trade reduce the cost of capital, spurring investment and supporting further expansion of production.
OECD (2011) presented a simulation derived from large scale global general equilibrium models to assess the effects of the coordinated reduction in trade costs related to tariff and non-tariff barriers. The main policy scenario assumes that G20 member countries implement a 50 percent MFN tariff reduction and a reduction of non-tariff barriers by 50 percent on an MFN basis. The estimated impact for Brazil is an increase in the real GDP by about 7½ percent over the long-run, most of it driven by a decline in non-tariff barriers.
Araujo and Flaig (2016) used a computable general equilibrium model to study the impact of trade liberalization.17 The simulation assesses the impact of a reduction in import tariffs (to the OECD minimum level), local content requirements (eliminate all requirements), and taxes levied on exports (to zero) in Brazil. The results show that: (i) aggregated production level in Brazil would increase by about 1.7 percent, driven by a pick-up in exports; (ii) lifting impediments to trade would allow a deeper integration to global value chains, as implied by the substantial growth in some manufacturing sectors and non-ferrous metal exports; and (iii) the largest gains in production would stem from zero-tax rates on exports, while for exports the gains would come from eliminating tariffs on imports of intermediate goods.
IMF (2017) analyzes the impact on investment of tariffs levied on capital goods. The result indicates that, if Brazil halves its average tariffs on capital goods (about 10 percent in 2015), it would increase investment by about 10 percent over the medium-term. Halving tariffs on capital goods in Brazil would raise its investment-to-GDP by about 2 percentage points. This is equivalent to an increase in investment of about 15 percent over three years assuming a real GDP growth of 2 percent on average.18
14. Greater integration into the global economy should improve external competitiveness. Recent studies on LAC countries show significant gains in external competitiveness and potential growth occurring through trade openness and participation to the global value chains.
Beaton et al. (2017) and Cerra and Woldenmichael (2017) show a statistically significant positive impact of trade integration (openness and integration to global value chains) to growth. Based on their estimated parameters, the probability of export surge in Brazil could increase by about 8 percentage points, if the degree of globalization in Brazil, measured by the KOF index of globalization,19 increases from the latest reported level to its frontier implied by per capita income among AMs and major EMs. Also, raising the degree of participation in global value chains from the current level (slightly below the 10th percentile) to the 25th and 50th percentiles of AMs and major EMs would raise annualized growth by 0.15 percent and 0.3 percent, respectively.
Cerdeiro (2016) simulated the effects of the TPP in Latin American countries, both the TPP and non-TPP member countries, using a multi-sector model. While the prospect of TPP is highly uncertain, the study can still highlight the potential gains for Brazil by joining large “mega” trade agreements. First, liberalization of tariffs and non-tariff barriers in TPP members would reduce exports in percent of GDP by 0.2 percentage points. Second, expanding the TPP to include nine Latin America and Caribbean (LAC) countries,20 including Brazil, would raise real income in Brazil by 0.4 percent.21 Also, using the estimated parameters in Beaton et al. (2017), increasing the number of trade partners in agreements to the 25the and the median of AMs and major EMs would raise annual growth by 0.5 percent and one percent, respectively.
15. Progress in expanding and diversifying bilateral, regional and multilateral trade agreements will be key for further enhancing integration. Until recently, Brazil has, through Mercosur, developed an extensive network of tariff agreements in the region. Trade agreements cover goods, services, investment, trade facilitation, technical regulations and government procurement. The network has been further extended to Cuba, Guyana and Saint Kitts and Nevis. Diversification of trade agreements, especially with the countries of the Pacific basin (Peru, Chile and Colombia) was also sought. The government intends to expand trade agreements with Mexico while negotiations to conclude the Mercosur agreement with the EU, which accounts for 20 percent of trade of the block, were resumed. Moreover, the bilateral agenda with the U.S., including the implementation and expansion of the agreements on Regulatory Convergence and Trade Facilitation, has been already signed.
16. Reforms in product and labor market regulation are critical for improving external competitiveness. In this context, it would be recommended:
strengthening competition by streamlining regulation on product markets and implementing planned reductions in entry regulations;
improving the technical capacity and planning for infrastructure concessions and elaborating more detailed tender packages prior to launching tender calls;
consolidating indirect taxes at the state and federal levels and working towards a value-added tax with a broad base, full refunds for input and zero-rating of exports; and, more broadly,
pursuing DB reforms.
G. Conclusions
17. Brazil can boost productivity through reforms aimed at improving the business environment and external competitiveness. As argued in numerous studies, lowering tariff and non-tariff barriers can enhance trade integration, improve economic efficiency, and boost investment and growth. But pursuing trade agreements, over and above the Mercosur partnership, bears promises of further global integration of Brazil and stronger growth. Product and labor market regulation reforms are also important for strengthening channels through which the business environment affects competitiveness and trade, as are reforms to the tax system. Implementation of trade measure should, however, consider the cyclical position of the economy: tariffs reduction could increase competition forcing some inefficient firms to exit from markets. Although this would increase productivity over the long run, it could result in higher unemployment and lower consumption in the short-run. This suggests that reforms should be carefully sequenced, paying attention to their potential contractionary impact on economic activity as the economic transformation unravels (IMF, 2016c).
References
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Prepared by Izabela Karpowicz (WHD) and Kenji Moriyama (SPR).
In 2016, 137 economies worldwide implemented 283 business regulatory reforms. This represents an increase of more than 20 percent compared to the previous year (Doing Business report, 2017).
Methodological changes have been introduced most recently in 2011, 2014 and 2015 to expand coverage by introducing new indicators and revising the components and methodologies of existing indicators.
The DTF score is calculated in two steps. First, DTF is calculated for each individual indicator using the formula: DTF for country j, indicator k= (Worst Performance – Country j’s score on indicator k)/(Worst Performance—Best Performance). Second, the DTF scores for each individual indicator are consolidated through simple averaging into one DTF score for each of the ten topics, which ultimately provides a country’s ranking on the topic. The country’s overall ranking is a simple average of its rank across all ten topics.
In the sample, it takes on average 251 hours to comply with taxes, there are 25 payments, and the total tax rate is 40.6 percent. (World Bank, 2016, Paying Taxes 2017: The Global Picture, World Bank Group and PwC.) Taxes and contributions include: the profit or corporate income tax, social contributions and labor taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees.
From the list of factors, respondents to the World Economic Forum’s Executive Opinion Survey were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The score corresponds to the responses weighted according to their rankings.
DB measures the time and cost (excluding tariffs) associated with three sets of procedures—documentary compliance, border compliance and domestic transport—within the overall process of exporting or importing a shipment of goods.
This has already been implemented in São Paulo, Fortaleza and Porto Alegre municipalities.
PIS is the contribution paid by companies to finance unemployment insurance and dismissal of employees who earn up to two minimum wages.
This is a robust observation even with the trade volumes are normalized as 1995=100.
The sample includes: Argentina, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Romania, Russia, Thailand, Tunisia, Turkey and South Africa. AMs follow the WEO classification.
Ding and Hadzi-Vaskov (2017) report a similar observation.
Lower integration into global supply chains could explain part of the recent export volume developments in Brazil.
Henn et al. (2015) also reported that institutional quality, liberal trade policies, FDI inflows, and human capital could promote quality upgrading.
Commodity exporters generally display higher domestic content in exports and lower export quality.
This is a comparative static, constant returns to scale multi-region Computable General Equilibrium model that captures inter-industry effects while tracking differences in trade patters by individual country and sector. For details, see Box 2 in Araujo and Flaig (2016).
This assumes constant investment and GDP deflators.
The index is defined over three dimensions: economic globalization, characterized as long distance flows of goods, capital and services as well as information and perceptions that accompany market exchanges; political globalization, characterized by a diffusion of government policies; and social globalization, expressed as the spread of ideas, information, images and people. For details, see http://globalization.kof.ethz.ch/.
Argentina, Bolivia, Brazil, Colombia, El Salvador, Guatemala, Nicaragua, Paraguay and Uruguay.
The simulation assumes a full tariff liberalization and a decline in non-tariff barriers to the levels of those of TPP members with less restrictive trade regimes.
