Currency rise, burdensome taxes and labor supply are formidable obstacles for new president
By Edileuza Soares
President-elect Dilma Rousseff and her team have stated that tax reductions, investment in innovation, and training of skilled labor are priorities of the new government. Whether those promises are upheld remains to be seen, but the Brazilian outsourcing sector is hopeful. At a time when Latin America professional services are more and more in demand, will Rousseff help or hurt Brazil’s chances for greater market share?
A representative of the Worker’s Party (PT), Dilma was elected with 56 million votes in the second phase of the election, beating the Social Democratic Party of Brazil (PSDB) candidate Jose Serra. She takes on her new role with the challenge of leading the largest economy in Latin America, the second largest in the Americas after the US, with the eighth-largest GDP in the world.
The change in government has caused real optimism among Brazilian IT companies, especially those focused outwards on the US market. On assuming command of a nation of approximately 192 million inhabitants, Rousseff immediately announced measures to improve the position of national companies both at home and abroad.
She has committed to investing in research and innovation to improve the competitiveness of Brazilian companies, and also to provide incentives to increase exports and modify exchange mechanisms to reduce the cost of products and services commercialized outside Brazil. This will all have a direct impact on the country’s large ICT market, and expectations of the business sector are that these measures will increase their participation in the global sourcing market.
“We have advanced in research and technology but we need to advance much more. My government will strongly support scientific and technological development to have control over knowledge and use innovation as an instrument to aid productivity”, said Rousseff in her opening speech to the Brazilian nation on January 1st. She does recognize the importance of information and communication technology in bolstering the growth of Brazil, which has recently expanded faster even than other emerging market competitors India and China.
“We hope the promises don’t remain idle promises” – Antonio Gil, President of Brasscom
A reduction of the tax burden is one of the priorities of Rousseff’s government; a theme that was in the plans of her predecessor Lula, but in which little progress was actually made. According to the president the implementation of a number of measures to modernize the tax system is urgent although she did not detail how the process would be carried out.
This theme was also discussed by the Minister of Development, Industry and Overseas Commerce (MDIC), Fernando Pimentel who recognized that the high tax rate in Brazil has a direct impact on companies’ competitiveness. The minister will assess tax relief to some sectors of the economy to boost exports.
Pimentel believes that even for development in Brazil’s domestic market, firms need to have an international footprint. But he is aware that for this to happen they need innovation and investment. Also addressing the lack of specialized skilled labor, the minister is committed to improving training for the youth, to better prepare for employment in the IT industry.
Today the Real is more valued than the dollar in Brazil, which increases the costs of contracts made in foreign markets, in effect penalizing firms that export IT services. One of the promises Rousseff and her team made was to curb that currency appreciation. Last week, the new president of the Central Bank of Brazil, Alexandre Tombini, announced that financial institutions who want more than $3 billion short on the dollar will need to keep 60% of the value of their positions in reserve. He intends to discourage bank short dollar positions and has stated that the new rule will go into effect on April 4th.
In December 2010, Brazilian banks were a net of $16.7 billion short on the dollar, against $2.9 billion in December 2009. The Central Bank hopes to bring that to around $10 billion.
Effective measures for IT
Rouseff’s plans pleased the association of tech companies who were already preparing for the new regime during electoral campaigns last year. They presented all candidates, including Rousseff, with a document serving as an overview of the sector called “The Strategic Value of IT”. The report shows that the Brazilian IT sector turns over $140 billion per year and has a weight of 8.3% on national GDP – it was meant to highlights the importance of the industry for Brazil’s continued growth.
“We hope the promises don’t remain idle promises”, says Antonio Gil, President of the Brazilian Association of Information and Communication Technology (Brasscom). He confirmed that everything announced by Rousseff’s team is on the IT agenda. He also said that tax relief is the main concern of companies that export services – the cost of labor in Brazil is one of the most expensive in the world because of benefits and other charges.
To ensure that companies become more competitive, the sector proposed to the government that they exchange a discount in social taxes for a 5% participation of the company turnover of those operating abroad. But Gil believes that only tax relief will not resolve things if the government does not implement a mass training program for professionals. To have skilled labor is essential for Brazil to reach its 2020 target of being one of the leaders in global outsourcing, with business value of $20 billion as compared to the present $3.5 billion.
Dilma Rousseff: Who is she?
Born in Belo Horizonte (Minas Gerais), Rousseff, 63, graduated in Social Sciences at the Federal University of Minas Gerais (FUMG). She took power after being the target of a series of allegations, one of which involved a lobby scheme in the government of Lula de Silva that led to the removal of her successor as Chief of Staff, Erenice Guerra.
Rousseff began her political life at the age of 16 and fought as a guerrilla during the Military Coup of 1964 in Brazil She was captured and condemned for her activities in which she was accused of armed fighting. Despite an early beginning to her political career she has not occupied many public seats. She has served as the Secretary of Mines, Energy and Communication for the State of Rio Grande do Sul; Minister of Mines and Energy in Lula’s government; and then as Lula’s Chief of Staff.
As she is assuming command of Brazil at a moment when inflation is under control and the economy is booming, there are high hopes for her government. Economists, business leaders, and indeed the Brazilian people are hopeful of a good term in office. Her promise in her opening speech was to continue the work of her predecessor, who remained in command of the nation for two mandates, from 2003 to 2010. “I have come first and foremost to bring continuity to the greatest process of affirmation this country has ever lived. I have come to consolidate the transforming work of President Luiz Inácio da Silva”, she declared.