Brazil Living Costs Surpass US; Economist Warns of Risks

By Filipe PachecoHigh costs are one of the prices international companies must pay for doing business in Brazil– especially when it comes to the services industry. Now one …

São Paulo: Making Manhattan look cheap.
São Paulo: Making Manhattan look cheap.

By Filipe PachecoHigh costs are one of the prices international companies must pay for doing business in Brazil– especially when it comes to the services industry. Now one of the most plugged-in financial institutions in the world, the International Monetary Fund, has released numbers that demonstrate what many suspected anyway: The cost of living in Brazil in 2011 rose to slightly higher than that of the United States.

Considering a list of 150 emerging economies, Brazil is basically the only one that had an expected GDP forecast for last year based on purchasing-power-parity (PPP) lower than the real GDP – which means the prices converted to American dollars are higher than in the United States.

The IMF estimates that the Brazilian GDP was US$2.51 trillion, which makes the country the 6th biggest economy in the world. Emerging economies typically have a higher PPP GDP than their real GDP, which means that, even though they might produce less than the United States, the same amount of money can buy more within their boundaries.

Brazil is essentially the only exception. Here, you can buy less than in the United States with the same amount of money. The other BRIC countries – Russia, China, and India – are all cheaper in the same comparison. Just four other emerging economies had results similar to those of Brazil, according to the IMF, but the comparison is not quite fair. They are St. Vincent & The Grenadines, a small archipelago in the Caribbean; Zimbabwe, with a hyperinflation economy that has destroyed the national currency; and the oil-rich regions of Kuwait and the United Arab Emirates.

What brings the prices higher in Brazil is the cost of services, since they cannot be imported. If national industry comes up with high prices for goods or machinery, for example, there is the possibility that competing goods or machinery can be imported, even though there are taxes that fall upon them. Those prices have become considerably lower recently, due to a depressed economic situation in the rich countries and China producing lots and lots of everything.

The Real Problem

Added to that is the value of the Brazilian real – today traded at about R$1.80 to every US$1. That price is affected by the exportation of commodities – Brazil is among the biggest exporters of iron ore in the world, for example – and the large inflow of foreign money that enters the country to take advantage of the high interest rates that still prevail here and the good prospects for the local economy. Another reason pointed to as an explanation for the high cost of living is a problem that is also considered a barrier for the IT industry as well: the high rate of taxes.

“This inversion shows that things here do not fit the normal pattern, because the currency rate is completely out of synch with historical activity, with a huge valuation in the past few years,” Armando Castelar, economist at Fundação Getúlio Vargas, one of the most recognized economic institutes in the country, told the newspaper O Estado de S.Paulo.

“Either Brazil gets cheaper and improves its productivity or we will become a services economy at an early stage,” argues Júlio Sérgio Gomes de Almeida, director of the Institute of Studies for Industrial Development (or Instituto de Estudos para o Desenvolvimento Industrial). He warns there is a risk of Brazil becoming an expensive country based only on a services industry, and without a strong industrial base.

Office Space Deluxe

Research done this month by the consulting company Cushman & Wakefield South America has shown that renting a business office in Itaim Bibi, in São Paulo, or in the charming neighborhood of Leblon, in Rio, is often more expansive than in fancy commercial areas of Manhattan or Washington DC.

In Leblon, the price for a square meter of commercial rental space is US$69.4 a month, while in Midtown Manhattan, a square meter may cost around US$63. In São Paulo, in the business regions of Avenida Faria Lima, Jardins, Avenida Paulista, or Chácara Santo Antônio, the average price for a square meter is about US$60.

In the past year, Brazilian office-space prices have risen 22.6% in comparison to the same period of 2010, according to Cushman & Wakefield. Even though the prices are high, the vacancy level is quite low – in Itaim, only 0.9% of the offices are vacant.

When it comes to services, a few other examples can give you a good sense of how expensive some things can be in the big Brazilian cities. Going to work out at a Rebook Center gym in São Paulo costs R$690 (US$385) per month with an annual membership, while in New York, the average price for the same chain is around R$382 ($US210).

Going to the movies costs, per person, R$28 (US$16), while in a good movie theater in New York, that would be R$24 (US$12). A cheeseburger with soda at the local unit of PJ Clark’s is around R$37 (US$21), while in the States that would be about R$32 (US$18). On your way back home, a ride from Avenida Paulista, in the heart of the city, to the International Airport at Guarulhos may cost R$108 (US$60), one dollar more than going from Manhattan to JFK – R$107 ($59). The numbers are drawn from research done by O Estado de S.Paulo.

“São Paulo scares me more and more each time I am here,” Raphael Quintella, who has lived in New York for five years, told the newspaper. “Going to a good restaurant in the city costs me more than going to one of the same level in New York. That is applicable to a good Japanese restaurant or to a churrascaria [typical Brazilian barbecue house].”