by Louis Smith
Brazil’s internal consumer market is the frequent topic of a lot of hand-wringing and disdain from both the financial media and people living in the country. High costs, poor quality and lack of choice are frequently cited as problems caused the protectionist policies that Brazil has had in place for decades.
As someone that faces the challenge of being a consumer in Brazil on a daily basis it would be easy to throw my hands up and blame Brazilians for allowing this to happen, but like many assumptions about Brazil blaming the victims of this policy is simplistic and shortsighted. Brazil is expensive if you compare it to a developed consumer market like the United States, but such comparisons are superficial without seriously looking at the context and reasons. The first thing to say is that Brazil is expensive, that is without out a doubt, however the problem with many articles in the financial press is they tend contextualise Brazil through their own editorial position rather than objective analysis. Often it is not what is said; examples often include high taxation, or editorial aversion to minimum wage policies, the problem is most often what is not said. Reasons and excuses are not the same thing, and this not written as a defence of historical economic decision making by Brazil’s leadership. However, to actually understand the reasons behind Brazil’s current consumer market model it does need to be put in context, both historically and in terms of successive Brazilian administrations’ policies over the past 20 years.
Firstly we need to look at who is participating in Brazil’s consumer market in the 21st Century. What is ignored is that a true mass consumer market in Brazil is less than 10 years old. That may sound odd to someone that has recently arrived in the country, with all the appliance stores, giant indoor malls and people driving new cars. But up until very recently the amount of people that could afford to participate consumerism was around at the most 20% of the population. The driver of this has been the emergence of a stable working class whom banks and credit companies can risk lending for goods such as cars and appliances – these people are frequently referred to as the “New Middle Class” or Class C in the Brazilian government categorisation, with a monthly income of around R$1,000-2,000 per month. The term “middle class” to describe this economic group has more to do with contemporary political semantics than what we would recognise as “middle class” in the context of a developed economy.
Poverty reduction in Brazil is often discussed in terms of conditional income support programs such as Bolsa Familia, however the real story of poverty reduction in Brazil is the continued stability and rising incomes of formal sector employees. This is intrinsically linked to Brazil’s closed market policies. It needs to be considered that the current Workers Party administration behaves much less like a traditional leftwing party and much more in the style of a Latin American corporatist party operating a post-colonial economic policy of Import Substitution Industrialisation. This is a policy put in place to offset the damage done to Latin American economies by the previous colonial systems.
Anti-colonialism arguments are often dismissed by some as antiquated excuses or radical leftist rhetoric, however to simplify why colonialism was so damaging it needs to be understood that most colonisers had a strict policy of suppressing industrial development in the colonised country favouring home industry to export refined and manufactured products back to the colonised country that was often the supplier of the raw materials. It isn’t hard to imagine the damage this did to economies like Brazil’s as they entered the modern era.
How does this relate to Brazil’s high prices? Imagine of how things are in most Western consumer markets; the post-war settlement in developed countries created a mass “middle class” over 60 years ago – which is more accurately described as working class with access to credit. Everything that follows reduces costs; infrastructure investment, which in turn has massive payoffs in reducing the cost of logistics, then 60 years of expertise in designing and managing supply and demand for goods from raw material extraction, to factory, to store shelf. As the world economy globalised this was followed by a decline of the developed economies’ industrial sector and a move from production to service work. This has reduced costs further in the wake of the end of mass labour movements and the subsequent weakening of the private sector workforce’s ability to organise to defend pay and conditions. The result is a service sector that at the bottom line has had labour costs squeezed to the point where working in a store in London means you are unlikely to own your own home or afford to pay for your children’s university or if you live in the US the need of health insurance effectively ties you to your employer, further minimising the ability to fight for better pay.
In terms of a single item what does this have to do with an expensive microwave in Brazil? Everything. The microwave brought in the US or UK, for example, is cheap because costs have been reduced across the lifecycle of the product and not just in terms of importation tariffs and taxation. On the positive, one cost reduction has been in the cost per kilometre in getting goods from factory to market – this applies to the components of the product prior to assembly as well -. This means that from the mine that extracted the metal, to the glass tray, to the copper in the wires, to the finished product there have been logistical and productivity gains that have dropped the price for the consumer. Now we get the negative, and it is a big negative. The Chinese assembled microwave that is sold in these markets has also had something else in it’s cost reduced to the minimum, wages. From the factory worker in China, to the US warehouse worker, to the shop assistant in Manchester all have had their wages pushed down so far that we now have a kind of reverse Fordism -that is the people that make and sell mass products can no longer afford to buy them, or if they can this is about all they can buy.
Now let’s look at the Brazilian consumer market and we’ll see the reason for expensive microwaves. Firstly as I mention Brazil has an incredibly immature consumer market, the cost reductions in management and logistics are not there, it is very easy to underestimate the effect Brazil’s weak logistics has on prices. On wage costs, the ability to push wages down is near impossible, not only is rising real wages the cornerstone of the current administration’s social and economic policy, the massive expansion of the economy in the past 20 years means the only way wages are going is up. Compound this with record low unemployment and skill shortages across the economy. On top of everything Brazil has one of the most complex and outdated taxation systems in the world. The issue with Brazilian taxes isn’t simply that they are too high, more importantly they are made up of decades of ad-hock policy making. Examples of this are the inter-State taxes. The original idea of this was to encourage competition between the States and to create locally accountable taxation – it is important to remember that although the Brazilian constitution guarantees access to public services individual states have the responsibility to deliver them, hence the need for sources of local state taxation. Instead what has happened is that State governments have used the local taxation system to shore up their own revenues separate from Federal allocation, so what was meant to provide independence and local accountability reverted to local clientism and what was supposed to encourage inter-State competition for lower taxes actually resulted in internal protectionism as States’ act to protect their own industry.
The solution often proposed is that Brazil should do what the US and UK did and drop tariffs on cheap imported goods, therefore there will be cheaper goods in the stores. But that is much easier said than done, and the reason is Brazil’s current stage of economic development. Protectionism is highly addictive to any economy, the longer it is in place the more difficult and socially damaging its removal becomes. An example of “how not to do it” was the shock therapy implemented in the post-USSR, the results for the country were plummeting life expectancy, vast inequality and a near total economic collapse in 1998. How does this relate to Brazil? It relates because in the terms of the closed nature of Brazil’s economy a sudden dropping of tariffs could have a similar effect, and in Brazil’s case would be far more socially destabilising. The principle of import tariff removal and free-trade is that cheaper manufacturing costs in – mostly Asian – markets will reduce the cost of living in the country that imports the goods. Also that superior imported goods will drive out low quality manufacturers and reward competitive industries rising productivity. However in any country for this is function efficiently it is highly dependant on a developed and sophisticated service sector that over time will mop up the lost manufacturing jobs and provide an economic base for the purchase of the imported goods, which in turn generates an ecosystem of further service sector employment in retail, distribution and call centres etc. Although Brazil has a roughly 20-20-60% spilt between manufacturing, agricultural and service sector employment that does not mean that the service sector is self-supporting or even stable. The service sector statistics seem impressive until you think but what those services are in Brazil. For example, women’s service sector employment mostly means cleaning up after other people, Brazil has the largest domestic workforce in the world. Without breaking down reams of statistics Brazil’s service sector it is not like the US or Europe, much of it is precarious domestic work.
Corporatism is another major cause of the famous “Brazil Cost” and the private sector in Brazil are complicit. Protectionism is the order of the day and Brazil’s business leaders encourage it – the argo-business sector being a rare exception. Due to the country’s erratic historical economic cycles – like Brazil’s consumers – there is often little culture of long term planning. The result is Brazilian businesses will price already uncompetitive products at the limits of consumer tolerance, rather than establish a long-term goal of building a customer base. On top of price gouging, there is almost no competitive behaviour between major retailers. Unlike the mass retailers of the United States and Europe Brazil’s retail prices are often still set by the supplier, so for example a bottle of beer will be sold at almost identical prices regardless of which supermarket you are purchasing from. The results that Brazilian consumers often have little understanding of competitive actions between retailers. Many in the wealthy and middle class will pay R$500 for a pair of jeans as a status symbol. The lower classes are often in a position where this is the first time in their lives they could afford anything and have no consumer education, and look at the monthly instalment, not the end price. Likewise brand supermarkets in Brazil are not competitive stores offering value via economies of scale, they are regarded as luxury stores that charge a premium for providing a pleasant shopping experience, buying from a street vender is almost always cheaper. An example of this is US giant Walmart’s Brazilian Nacional stores; on the surface they look like any supermarket in the US, however on a closer look they are nothing of the kind, no competitive pricing, poorly managed, little in the way of customer service. Walmart arrived in Brazil and instead of shaking up the market it just started behaving like a Brazilian company. This happens time and time again. Look at Spanish clothing giant Zara. A Brit or Spaniard would regard a Zara as a cheap and cheerful clothing store, in Brazil it’s a luxury brand reserved for high end malls. Other anomalies include European beers such as Heineken and Stella Artois, both hardly regarded a classy beverage in Europe. In fact Stella Artois is more often associated with poverty and anti social behaviour, its popular nickname in England is “wife beater”.
The reality of protectionism is that it does protect jobs, but the question is the cost to the broader society. There is no doubt that a sudden shift to an open economy would create mass unemployment and possibly threaten serious social unrest. That said, there are a lot of bright spots in Brazil and considering how difficult it is to do business in Brazil it is an amazingly entrepreneurial country – much out of necessity, and it isn’t hard to imagine that even if the bureaucratic brakes were loosen slightly the results could be very positive. In Brazil, like in the US, there is always a level of cognitive dissonance about opening markets; as in the US you often hear complaints about cars etc. not being “Made in America” at the same time not realising that cheaper imports from Japan and China actually increase their purchasing power, reducing perceived inflation etc. This also happens in Brazil, It is common to hear complaints regarding the ever increasing previlance of China made goods.
Regardless of economic positions Brazil’s protectionism protects Brazilian jobs reducing aching inequality and the result is paying more for things. Essentially Brazilians pay more to keep their fellow Brazilians in a job. Protectionism in Brazil is effectively a form of social welfare that the State doesn’t have to deliver. Brazil is not a rich country yet, it is an upper middle income country that needs to maintain the social and economic gains of the past 20 years. A sudden opening of its market would directly threaten Brazil’s future development. A sudden opening of markets would have the effect of mass unemployment as the service sector would not be able to pick up the slack and would actually contract as demand slumped, creating a downwards spiral that would risk all of Brazil’s impressive gains post-dictatorship. There may be another longer term positive externality to Brazilian protectionism, maybe that Brazil’s consumers would be shielded or at least accustomed to future higher costs of Asian made products. Real wages in China are growing rapidly and we may see a slow motion “oil shock” as rising prices for Chinese goods start eating into the purchasing power of consumers reliant on cheap prices to maintain living standards. Brazil with a large internal – albeit inefficient – manufacturing sector means this would have less of an effect, or at least allow for mitigation. Much of Brazil’s economic oddity can be explained by the massive expansion in its consumer base over the past 20 years. Both money for investment and, as important, expertise is spread too thinly. Plummeting poverty in Brazil has created the odd situation of being a victim of their own success.