As Brazil Sharpens Global Competitiveness, the Government is Criticized for Protectionist Tendencies

neto_economist
Fraga: Back to 70’s style protectionism?

By Luke Bujarski

Esteemed economist Arminio Fraga Neto recently issued a mixed assessment of the macroeconomic and political environment of Brazil, noting that the government is indeed “listening” to the needs of the private sector but also doing too much to protect specific industries. Fraga was one of several notable speakers at the recent “Brazil Summit”, organized in New York City, by the Brazil-American Chamber of Commerce, where global services was one of the prime topics of discussion. Many participants agreed that Brazil’s political leaders are better engaged with industry that at any time in recent memory.  “The government is starting to listen,” explained Francisco Ricardo Blagevitch, the President of Brazilian end user support solutions company ASYST, when asked about how the policy environment has changed around global services.  “They are starting to connect the dots that the global services industry is more than just about jobs – it’s about Brazil’s long-term competitiveness. In 2010, Brazil’s ICT industry employed 2.5 million people with an average growth rate of 9.9 percent, according to data from BRASSCOM.

In response to the needs of the global sourcing community, BRASSCOM, Brazil’s main IT advocacy group, recently partnered with McKinsey to develop the ICT 2022 plan aimed at ensuring the viability of a healthy technology and innovation ecosystem in Brazil. Focusing on human talent, infrastructure, business environment, financing, and digital promotion and education, ICT 2022 will match objectives with government investments as the country looks to meet the IT needs of a growing economy.

One bone of contention addressed by the audience was Brazil’s high tax environment.  On a positive note, Mauro Vieira, Ambassador of Brazil to the United States also noted that greater tax relief will go even further to strengthen Brazil’s already attractive investment climate. As part of ‘Brasil Maior’ (Better Brazil), a government plan to strengthen competitiveness through policy aimed at supporting specific industries – manufacturing, technology, and international commerce specifically – the government aims to adjust social security obligations based on gross revenue instead of payroll, as a means of lowering the tax burden.

Focus on Innovation

Those within sourcing circles understand well that Brazilian IT firms must compete beyond cost as a delivery platform for global services. “Even bad IT firms are growing in Brazil,” expressed Bruno Guicardi, President of IT services firm Ci&T, in highlighting existing market opportunities across Brazil’s domestic ICT sector.

But Guicardi also stated that when it comes to the global market “we [global Brazilian IT firms] are not in the business of competing on cost. Innovation and quality is what differentiates us in the global market place.”

As the world’s 4th largest ICT market, domestic demand for IT professionals has strained opportunities to service demand in foreign markets. In 2011 Brazil’s financial services industry invested US $10 billion in technology; in the public sector there were more than 25 million electronic tax declarations; Petrobras, Brazil’s oil mogul, aims to double production capacity over the next seven years according to Jose Roberto Fagundes Netto, General Manager of Research and Development at PETROBRAS; manufacturing is Brazil’s third largest IT buyer after finance and telecom. Likewise in agriculture, the demands for IT innovation will continue to grow.  According to data from BRASSCOM, 25 percent of the world’s food supply is grown in Brazil.

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Fraga Warns of Big Government

Economist Fraga keynoted the event with some sobering analysis about Brazil’s macroeconomic and government policies and their impact on future growth.  “The government reminds me a little too much of Brazil in the 70s. It comes in practice in many different forms – where the government is guiding and pushing different sectors through subsidies and protections.  Inflation is at the top of my concerns. Great weight has been put on state-owned companies [PETROBRAS] to keep prices low at the pump.”

Fraga also acknowledged and praised the Brazilian government for its transparency.  “To the government’s credit nothing is done in disguised fashion, it’s all there. It’s not like what’s going on in Argentina where the numbers are unclear. The government means well, I think they’re willing to listen and try some new ideas.”

Fraga also expressed concern about the low rate of investment in Brazil, which has declined from 19 percent of GDP to 18 percent from 2011 to 2012.  “More emphasis needs to be put on productivity and education.  The needs [in infrastructure] are dramatic we need to put more money into our ports, airports, roads, sewerage, power creation. Another thing that bothers me right now is that the presidential race has already started. It is way too early for politicking.  All of a sudden the ability to cooperate has gone down to very low levels.  People spend a lot of time campaigning and coalitions.”

On a more positive note Fraga stressed confidently that there are things that will prevent us in going down the wrong direction. “We have strong institutions with a good track record. We have a stable social political environment.  When you look at the emerging economies you don’t get that everywhere.  We also have a strong independent press that has done an excellent job in keeping things in check.  The quality of the debate on national issues is excellent.”