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Rio de Janeiro: the annual battle over the minimum wage is a crucial concern of Brazil’s poor |
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This time a year ago, Brazil was teetering on the brink of disaster. The government’s nightmare, a forced devaluation of the real, had come true. All the work of the previous four years seemed about to unravel, and the country faced rising inflation, unemployment and recession. Many analysts expected, at best, that the economy would shrink by 5%.
None of this happened – the economy actually grew in 1999, by 0.8%. inflation stayed low, at about 8%, and industrial production, although it slipped last year by 0.7%, is set to grow by 5% in 2000.
What went right? Pedro Malan, Finance minister, says it was a combination of factors (see interview) that, taken together, amount to Brazil’s economy being more stable than most had thought. But if the worst is over, there is still a lot to be done. The imbalance in the Fiscal accounts is still a concern. The government met its target last year of a 3.1% primary budget surplus, which excludes interest payments. But the overall budget deficit, although expected to fall to 4% this year from 10% in 1999, remains a drain on investment.
An unworkable tax system
The trade balance, too, is improving, and has moved out of the red this year. But the current account deficit, although it fell from $34.9 billion in 1998 to $24.1 billion last year, adds to the burden.
On top of this, industry continues to complain, rightly, of an unworkable tax system that prohibits investment and holds back the country’s export potential. These and other factors mean that GDP growth this year will be restricted to about 3% – a remarkable achievement given the situation a year ago, but modest in comparison to Brazil’s potential, and far short of the development needed to deal with pressing social problems.
Being forced to compete in an unequal tax environment is the latest challenge facing Brazilian companies, which have had a tough ride over the past decade. First they were exposed to foreign competition, after decades of protection, as trade barriers fell during the early 1990s. Then, with the launch of the Real Plan in 1994, they were exposed to the rigours of a stable currency and low inflation. Productivity and cost-cutting, previously very much in second place to Financial engineering, became of prime importance.
Then came the after-effects of the Asian crisis from 1997, when the government raised interest rates to crippling levels – base rates topped 40% – to fend off attacks on the real.
Many companies failed to keep up, and were either bought by competitors or forced into liquidation. Those that survived say they have achieved efficiency gains only to be handicapped by the government’s failure to reduce those costs of doing business that are beyond companies’ control.
Ironically, 15 months after a major devaluation, some economists say one problem is the strength of the real. “For the First time in many years the government is doing what it promised on the Fiscal side,” says Octávio de Barros, chief economist at BBV in São Paulo. “But the external side is a long way from completion. We need much bigger export growth than what has been achieved.” He argues that the recovery of the real following the devaluation – it plunged to R2.23 to the dollar before rising steadily to R1.73 last month – came too quickly. He says a real-terms devaluation of 30% to 40% was about right, but that the currency is now devalued by much less than 30%. This not only restricts export growth, but leaves Brazil vulnerable to sudden devaluations – though on a smaller scale than last year – in reaction to overseas shocks or worries about the Fiscal situation.
De Barros says the government has three options to correct the imbalance. It can increase its foreign reserves by buying cheap dollars on forex markets, following the example of Mexico, which was rewarded this year with an investment grading from ratings agencies. It can reduce the stock of dollar-denominated debt, something the IMF has been encouraging it to do. Or it can reduce interest rates, which he argues can be done without running the risk of sparking inflation, although other economists disagree.
Another brake on competitiveness is the tax system. For years, industry has demanded an overhaul of the bewildering system of municipal, state and federal taxes and “contributions”. The most recent of many proposals is now before Congress.
The chances that reform will make progress this year are remote. Municipal elections in October are already distracting the attention of Congress. Mayors, especially in big cities, are powerful Figures with big budgets at their disposal. The outcome of the elections will have a big impact on the rest of president Cardoso’s mandate, and on the run-up to presidential and gubernatorial elections in 2002.
Progress has been made in other areas, however. One measure that should take effect in the short term is what is called the Fiscal responsibility law, expected to be approved in the current congressional session. This is designed to prevent all levels of government from exceeding their budgets, and will be important in keeping Fiscal accounts in check in the run-up to October’s elections. The government also succeeded earlier this year in getting congressional approval for the DRU, which releases about 20% of tax revenue earmarked under the constitution for spending in specific areas.
Progress on the Fiscal front has been made, but many complain that it has been achieved at the cost of regressive taxes that place further restrictions on investment. The chief culprit is the CPMF, a tax charged at 0.38% on all Financial transactions. “The primary Fiscal deficit has been reversed,” says Marcelo Carvalho, chief economist at JP Morgan in São Paulo, “but most of the improvement has come from poor-quality measures. The government must reform taxes, but the prospects this year are very poor.”
Although progress on the Fiscal accounts is to be applauded, the real cheers will come only when the quality of the Fiscal accounts has been improved and provide a basis for investment and sustained growth.
Savings shortfall
“The big obstacle to growth now is the government’s lack of success in promoting savings,” says Carvalho. “They need to reduce negative public sector savings, by dealing with the overall budget deficit, and to promote private savings. Among other things that means progress on social security reform.”
Reform of the pensions’ system has been high on the agenda for years, but faces tough political resistance. There are two basic state systems, for public and private sector workers. The private sector system, known as the INSS, produced a deficit last year of R9.7 billion after making benefit payments of R60.5 billion to about 18 million pensioners. The public sector system ran up a deficit of R29 billion after payments of more than R40 billion to just 3 million beneficiaries.
Cutting benefits in the public sector, where workers often retire young on full pay or more, only to be reappointed, faces a barrier of entrenched interests. A law passed this year will cap public sector pensions to a maximum R1,255 a month, but it applies only to employees entering the system from this year.
In the meantime, taxpayers must fund a growing gap between contributions and benefits.
The gap came under renewed pressure last month as the government and its allies in Congress fought a battle of nerves over the annual increase to the minimum salary, previously R136 a month. Although the minimum has little impact on many salaries in the more developed parts of the country, it does have an effect in poorer areas and, most important, a direct impact on pensions. The government says an increase in 1995 from R70 to R100 a month doubled the social security deficit.
The government succeeded in holding this year’s increase to R15, bringing the minimum to R151 at an estimated cost to the treasury of R1 billion. Its allies had wanted as much as R180 a month. The new minimum on its own will make it harder to meet Fiscal targets – ministers were unable to say where the extra cash would come from. But, potentially more damaging is a clause allowing state governors to set whatever minimum salary they wish.
This could make it harder for the government to make much-needed increases in spending in areas such as health and education. Some success has been achieved in health by Fighting corruption and making better use of resources by handing down responsibility to local levels. But the system still oVers ample opportunity for fraud, and local health services are stretched beyond their means.
Education, too, presents long-term problems.
Carvalho at JP Morgan says the area presents “the most important long-term challenge for the economy, of investing in human capital”. Spending is channelled out of all proportion towards the public universities. These are free but set tough entrance exams, for which students study at expensive crammers. That means the best universities are packed with the children of the elite, who can afford to pay but don’t, while poorer quality, fee-paying universities cater to the less well-off. Meanwhile, spending on public primary education remains well below requirements and public sector schools can oVer their students only half-time education.
But the outlook is far from being totally negative. After Fleeing the country before and after the devaluation, foreign investors have started to return, and stock exchanges began to see net inflows this year.
More important, foreign direct investment remains high. Last year, it amounted to about $30 billion, of which just $8 billion to $9 billion was related to privatization. The rest was spread widely in different manufacturing and service sectors.
This year, too, FDI is expected to be high, at about $25 billion. Some of that will go to privatization sales – the former São Paulo bank, Banespa, is due to be sold in May, and licences for PCS (personal communications system) telephony are expected to be sold later in the year – but, again, the remainder is expected to represent broad-based investments across the economy.
Octávio de Barros at BBV says this year, with the municipal elections in October, oVers an excellent opportunity for the country to demonstrate that it can keep on the right course in difficult times. He is confident Brazil has turned the corner.
A stand-off earlier this year between the federal government and the state of Minas Gerais gives a measure of how much has changed during the year following the devaluation. It was Minas Gerais, led by former president Itamar Franco, that triggered the crisis last January by refusing to honour foreign debt.
Then, the government stepped in, to no avail.
This year, Franco threatened again not to honour Eurobond payments. “Go ahead,” Brasília said, knowing this time it would be Minas Gerais, not the federal republic, that would suffer. Franco found the money.
Far less shocking
Pedro Malan, Brazil’s long-standing finance minister, argues that a free-floating exchange rate regime reduces the country’s vulnerability to external shocks. Internally, regional politicians pushing for social expenditure now understand that the revenue has to be there to back them up
Pedro Malan, Brazil’s long-standing finance minister, argues that a free-floating exchange rate regime reduces the country’s vulnerability to external shocks. Internally, regional politicians pushing for social expenditure now understand that the revenue has to be there to back them up A year ago predictions were that things would be much worse now than they are. Brazil has recovered very quickly from the devaluation, some say because of luck, others because of good judgement. What happened?
| Pedro Malan | ||||||
Projections made in the very turbulent months of January and February last year were for declines in real rates of GDP growth from minus 4% to minus 7%, inflation from 40% to 80%, the exchange rate going to R2.00 to R2.50 to the dollar, unemployment reaching 11% by mid-year. It’s understandable, with the overshooting of the exchange rate which reached R2.23 in late January.
So, why the reversal? It’s a combination of things. First, the structural changes in the Brazilian economy which occurred in the last Five years, opening the economy to the stabilizing potential of imports. The fall in inflation to civilized rates proved to be powerful in terms of increasing the operational efficiency of Firms and reducing costs. In the past, for several decades, companies were protected by this double combination of high and rising inflation, which allowed Firms to shift to the consumer any cost increases, including those arising from operational and managerial inefficiencies, and they were protected from foreign competition.
The second factor was how quickly we were able to review our programme with the IMF. We reached a new understanding by early March, and went immediately to New York, Tokyo, London, Paris, Frankfurt, Rome, Madrid and Lisbon, in a purely voluntary cooperative approach with our private creditors, to preserve short-term lines of credit, interbank lines and trade-related credits.
We reached a voluntary agreement, a standstill, for the preservation of the credit until August 31 1999.
The third one is the fact that there was very strong support in Brazilian society and in the economy for the sacrifices which were required to preserve the purchasing power of the real.
In all levels of the productive chain you could see a refusal to pass the overshooting of the exchange rate on to domestic prices. So supermarkets and their customers, for example, shifted to lower-priced products.
I should also add that the economy was flat, so there were no demand pressures pushing for upward movement of prices. There was a small decline in real GDP in the second half of 1998, so many Firms were not able to charge higher prices.
Plus there was a reaffirmation by the government of our commitment to both attaining our Fiscal targets and to continuing the process of changing the Fiscal regime.
And last but not least we decided to announce that we were moving, since the exchange rate was not an anchor any more to inflation targeting as a framework for monetary policy.
If you want to say there was a certain amount of luck there too, feel free, but it was not luck alone.
You met the IMF targets for primary surpluses perhaps sooner than many people expected, but some critics say you were only able to do it because of regressive taxes like the CPMF which restrict the private sector’s ability to invest?
We are now going into the sixth consecutive quarter of fulfilling our part of the targets established in September 1998, prior to any conversation with the Fund. We announced a three-year Fiscal programme for 1999, 2000 and 2001 on September 8 1998, with the objective of generating high and rising primary surpluses to stabilize and put on a declining path the total debt to GDP ratio. We fulfilled our targets for December 1998, we fulfilled them for the whole of 1999 and we are going to fulfil them for 2000.
On the question of the composition of taxes, these are the taxes that we have at the moment. The CPMF will cease to exist as it is today in June 2002. It’s not the ideal tax, we all agree that and the rate is probably far too high. In the tax reforms now under discussion it will be replaced by a tax on Financial transactions which will be much lower than the current one, with one important element: it will be deductible and compensated by other contributions, so the distorting effects will be sharply reduced.
As for the distortions of the Brazilian tax system, this is what we are trying to deal with in the tax reforms. We have already made some very significant progress. One of the main problems that we have is that we have 27 states and 27 different pieces of legislation on the ICMS, the equivalent of value-added tax at state level. We have already agreed on having one, single, national, uniform legislation on ICMS, so we are going to replace the 27 existing laws, with all the problems they entail of inter- and intra-taxation.
Congress already seems to be distracted by the municipal elections coming up in October.
There was progress in the recent emergency session but since then things have slowed down. How optimistic are you about the legislative programme for the rest of the year?
We have been making progress. We have approved what we call the DRU, which deals with the excessive earmarking of revenues, which is an important element in giving us Flexibility in Fiscal policy, by reducing by 20% the amount of earmarking of revenues to expenditure.
We will shortly approve the Fiscal responsibility law, which will be effective for the municipal elections this year. This is absolutely essential for changing perceptions about our ability not only to achieve quantity targets but also to change the Fiscal regime.
The budget will be approved shortly. I can’t tell you that the tax reform will be approved this year. We will have to make an effort to that effect. You are right in saying that traditionally Congress goes into slower motion during the months preceding elections, but we are dealing with an important thing.
Consumer interest rates are the lowest they’ve been since the beginning of the Real Plan, but the base rate remains extraordinarily high.
You seem to be working with measures designed to expand credit without actually lowering base rates. What can happen here?
The interest rate that really matters is the real interest rate, not the nominal one. The basic rate has been 19% since September last, but in real terms, with inflation last year of 8% or 9% and wholesale price inflation twice that because of the effects of the devaluation, the real rate is the lowest under the real.
If you think about expected inflation for the next 12 months, we’re talking about a 6% rise in consumer prices, so the rate would be 13%, but we’re not going to stay at 19% for the next year.
The trend over coming months is of course downwards for the basic interest rate.
How much foreign investment are you hoping for in 2000?
FDI in the First three years of this decade was less than $1 billion. In 1994 it was close to $2 billion, in 95 it was $5 billion, in 96 it was $10 billion, in 97 it was $17 billion, in 1998 it was $26 billion and in 1999 it was $30 billion. In the last two years Brazil was probably the fourth or Fifth largest recipient of foreign direct investment, not in emerging markets, in the world at large, after the US, the UK, China and France. For the year 2000 until yesterday, we had some $5.5 billion, in two and a half months. I don’t like to make predictions, but most analysts expect at least $25 billion this year.
What are your plans for international borrowing?
This year we have launched three issues over 30 years, 20 years and 10 years, and we will issue in yen shortly. We are very close to our requirements for this year, but we reserve our right to analyze market conditions and tap the international markets where appropriate.
We are looking for $5 billion to $6 billion this year. We have already issued more than $3 billion and have close to $2 billion to come from the World Bank and the IDB. We have used only slightly more than 40% of the $41.5 billion package agreed in October 1998, and are already repaying what we have used.
Brazil was hit by the Asian and Russian crises and then last year by the debt freeze in Minas Gerais state. How vulnerable is the country to external or internal shocks?
Our vulnerability to external shocks has been significantly reduced by the fact that we have a Floating exchange rate regime. The evolution of foreign direct investment is an expression of confidence in Brazil over the medium and long term. There is no other way of interpreting the progression from less than $1 billion a year to more than $30 billion.
On the internal side, shocks derive from our ability to resist pressures, in a country with vexing social inequalities, and expenditure increases for which there are no corresponding revenues. Brazil is a country with enormous demand for increases in expenditure, especially in the social Weld. There is a changing perception on the part of politicians that the two things must be seen together – when you make a claim for increased expenditure you have to be able to identify the Financing. For the First time we are having a more rational discussion about some of these issues.
The minimum wage is a good example. Ministers are going to Congress now to demonstrate the constraints under which we operate. The question is not to say how nice it would be to have a minimum wage of x reals. This has a cost, for the social security deficit, for inflation, for the labour market, for unemployment, and this must be part of an informed discussion instead of expressions of preferences.
And the only reason we are able to have this discussion now is because we have dealt with inflation – a veil, a dust cloud which prevented a serious discussion about the two sides of the balance sheet. I think there’s an important cultural shift taking place, the degree of political maturity and of economic rationality is improving. Maybe the pace is considered a bit slow for some but I can assure you that it is changing and will continue to change.
What about your own plans after the ministry?
You’ve been mentioned as a presidential candidate.
Well, my plans are to do a good job as minister of Finance. I’ve been here a long time now. But forget about names. The fact that some people raise this possibility is related to a more fundamental thing: the perception that the economic situation in Brazil has improved and may continue to improve from here until 2002. This means that the weight of the president in selecting his successor will be greater than under more difficult economic conditions. I’m more concerned with the structure and the fundamentals than with names, because I believe in teamwork.
The Banespa factor
With interest rates falling Brazilian banks must move away from holding government bonds to lending to consumers. Margins are set to fall and size matters more than ever. That’s why the fight to win Banespa in the forthcoming sale is crucialThis will be a busy year for Brazil’s banking industry. The planned sale next month [May] of Banespa, the bank formerly controlled by São Paulo state, will lead to realignment among the leading institutions and could provoke a further round of consolidation.
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Sãu Paulo: Banespa’s activities are concentrated in the richest part of the country |
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Much has changed in banking since the real was introduced in 1994. With the disappearance of easy earnings from the free Float provided by high inflation, dozens of smaller banks went under along with a few big ones.
But some of the problems of the past remain.
Earnings from inflation have dwindled, but interest rates remain high and banks can still make easy money by sitting on high-earning government bonds.
That means the incentive to improve efficiency in normal banking activities – lending, Financial services, and so on – remains weak.
Despite impressively advanced phone and internet services in some areas, a legacy of the sophisticated systems used to milk inflation to the last drop, bureaucracy is cumbersome and queues in retail banks are long. A recognizable service culture remains absent.
Service quality picks up
The big banks say things are changing. Roberto Setubal, president of Banco Itau, the second-largest private bank, says the sector recovered more quickly than expected last year from the devaluation in January and began expanding credit operations. “Our way of operating changed in the second half with an increase in confidence in the economy. We were able to become less selective in the way we grant credit.”
Itau’s loans to private customers increased 110% between December 1998 and December 1999, to R2.5 billion. Its profits, too, reached new heights: R1.8 billion for the year. The bank says it made extraordinary gains thanks to the devaluation of the real in January because it has Fixed overseas investments in Argentina and Portugal.
Other banks also did well. Bradesco, the biggest private-sector bank, reported profits of R1.1 billion. Unibanco, the third-biggest, said earnings rose by 30% to R591 million.
All three said they were relying less on government bonds than in the past and making more from normal banking operations. The banks also planned to expand credit operations in the future, both to private customers and to industry.
Analysts say that, as interest rate spreads fall, banks will have to strengthen their loan portfolios. Most important, they will have to expand credit operations to the lower-income population. With consumer credit (excluding leasing and housing loans) accounting for just R20 billion, or about 3%, of annual consumer spending of about R650 billion, the room for expansion is large. But while the rate of loan default has been falling, expanding into this market clearly has its risks.
Nevertheless, analysts say it is a market that banks will have to chase in order to make money under low inflation and falling interest rates. Rates to consumers, although extraordinarily high at about 80% a year, are falling and will continue to do so.
Recent moves by the central bank, such as reducing reserve requirements on sight deposits from 65% to 55%, allow it to promote credit availability, keeping its base rate at 19%, unchanged since last September.
“Scale will be crucial under low interest rates,” says Pedro Guimaraes at Bozano Simonsen, an investment bank in Rio de Janeiro. “The big growth market is among low income earners, which means banks have to be prepared to make low returns on assets.”
The leading bank in this market has long been Bradesco. It has big interests in non-Financial groups like CSN, the steel group; Light, an electricity distributor; CVRD, the mining group; and others. Because, in Brazil, all wage-earners must open a salary account to receive their pay (irrespective of whether they already have a bank account, even at the bank in question), Bradesco has guaranteed earnings from employees of these groups.
Analysts say Bradesco and Itau already approach the scale necessary to face the future. Nevertheless, they are getting ready to compete with Unibanco and foreign groups such as HSBC, BBVA, Santander, BankBoston and Citibank, plus Safra, an aggressive local bank, at the Banespa sale.
The attraction is clear: Banespa has 2.7 million account holders, R11 billion in deposits, R6 billion in assets under management and runs the country’s biggest insurance brokerage. Its activities are concentrated in São Paulo state, the richest part of the country.
The foreign banks that have declared an interest are already active in Brazil.
BankBoston and Citibank have been present for many years, concentrating on high-income customers. HSBC, BBVA and Santander all bought medium-size banks that ran into difficulty after the introduction of the real. Analysts say they have not been able to expand organically as quickly as they may have planned. “It’s their last big chance to achieve scale through acquisition,” says Guimaraes.
Battle to improve transport
Avança Brasil is the government’s new programme to make the country’s transport system more efficient. But will it prove any more successful than the last one?Talk to any company about doing business in Brazil and the conversation will soon turn to the custo Brasil, the catch-all phrase for the taxes, social security contributions, bureaucracy and other factors that put Brazilian Firms at a disadvantage to their competitors.
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One of its biggest elements is transport costs. Ports are expensive and inefficient.
Railways are dilapidated. Roads are in poor repair and mostly unpaved. Transport by river and coastal shipping – despite the country’s immense coastline and river networks – is only incipient. The drain on competitiveness is obviously huge.
During Fernando Henrique Cardoso’s First presidency, from 1995 to 1998, the government launched a programme called Brazil in Action (Brasil em Ação), a set of 42 high-priority infrastructure projects expected to absorb public and private-sector investments of $53 billion by 1998. A third of the projects involved transport.
Brazil in Action has since been replaced by a new programme, Forward Brazil (Avança Brasil).
Ministers are cagey about how much money actually went into Brazil in Action and insist its replacement does not amount to an admission of failure.
Indeed, in many areas of infrastructure, such as telecommunications and electricity, private sector investment has been bigger than anticipated.
But improvements in transport have been lacklustre. Railways are one example. Brazil is a country of enormous size and generally flat topography which produces large quantities of bulk goods: ideal conditions for a vibrant railway network. But the railways were nationalized in 1957, at about the same time as the government attracted big foreign vehicle manufactures with promises of investments in highways.
By the time the rail networks were privatized in 1997, they were carrying just 9% of freight. That Figure was supposed to rise quickly to 15%, but has not done so. One reason is that the networks’ new owners, some of which are foreign companies, discovered rolling stock and, especially, track in far worse conditions than they had imagined. They were unable or unwilling to make the investments needed, and failed to meet government targets for attracting cargoes away from the road hauliers.
“It’s true the rhythm of improvement hasn’t been what was expected,” says Alderico Jefferson Lima, interim minister of transport. “Some stretches were in far worse condition than expected, but the companies are now restructuring and we are monitoring compliance with our targets.”
Freight trains going slower
Some critics say the reason targets have not been met is that they were the wrong way about: instead of demanding investments and, say, improvements in the speed locomotives travel, the government demanded cargo increases – that is, market objectives. But no-one controls the market, and many freight trains are going no faster today – as slow as 15 kilometres per hour, compared with 70kph in the US – than they were before privatization.
Claudio Barbieri da Cunha, a specialist in transport infrastructure at the Polytechnic School at the University of São Paulo (USP), says the structure of Brazil’s road haulage industry makes it impossible for rail and other alternatives to compete.
He gives the example of a cattle-feed company that set up a distribution centre next to the railway in São Paulo state, to send goods to the agricultural interior as far off as Mato Grosso and Rondônia. But it soon found it cheaper to send its feed all the way to Rondônia by road, than to send it halfway by train and by road from there. This is because hauliers are prepared to do the work at almost below cost and there is a pool of labour willing to take over from those that go out of business.
The government is looking for alternatives.
Much was made under Brazil in Action of multi-modal corridors – road, rail and waterway combinations to carry produce from the fast-expanding agricultural territories in the centre-west to domestic markets and to ports in the north-east and south-east for export.
Some have been successful. The Tietê-Paraná/Paraná-Paraguai integrated waterway is one, transporting crops and other goods across an area responsible for some 85% of GDP of the four Mercosur countries.
Dredging and new harbour facilities have increased traffic on the Rio Madeira, linking Porto Velho in Rondônia to Itacoatiara on the Amazon, from 2.5 million tonnes in 1997 to 5 million tonnes last year.
“It’s been a fantastic success,” says Jefferson Lima at the ministry. The route provides an export alternative to goods that previously went by truck to Santos.
Other projects, such as the Araguaia Tocantins multi-modal corridor, have not taken off. This combination of road, rail and river transport was planned to take cargoes to the deep-water port of Itaqui by the end of next year. But it is well behind schedule, mostly because of environmental objections.
There have been advances, too, in the modernization of Brazil’s ports. These were notoriously inefficient. Loading a container at Santos, the biggest port in South America, cost $600 before the terminal was privatized.
It has fallen to about $250. At Suape, in Pernambuco, the cost has fallen from $325 to $130, comparing favourably indeed with Buenos Aires ($120), Rotterdam ($96) and Le Havre ($197).
But Barbieri da Cunha at USP says spending on ports is driven as much by politics as logistics. “Do we really need so many hub ports?” he asks. “The government seems more concerned with creating jobs in individual states than with the global infrastructure situation.”
The ministry says Forward Brazil takes a more holistic approach than Brazil in Action and will address the real needs of the country.
Meanwhile, the custo Brasil will give businesses plenty to complain about for some ime to come.
Internet crazy in the tropics
Brazil has been gripped by internet fever. The ads of internet companies are everywhere – on billboards, airport luggage trolleys and on taxis, city buses and subway trains. At street crossings in the largest cities, there are even special promoters hired by publicity agencies waving Flags with the names and logos of the largest access portals and sites to attract the attention of drivers. This year more than $100 million will be spent on advertising by internet companies in Brazil.
The web boom in urban Brazil is starting to resemble the explosive growth seen in the US and may be moving at a faster pace than some parts of Europe. The statistics are not very precise though. The number of Brazilian internet users is estimated at between 3.8 million and 7 million. Either way it’s only a small part of the 160 million Brazilian population, something between 2.5% and 5% of the total. But according to International Data Corp, internet growth will continue at a rate of 50% a year until 2003.
The biggest Brazilian access portal, UOL, controlled by Folha de S.Paulo and Abril, two of the major local media groups, has about 600,000 subscribers, who pay between $10 to $15 dollars a month, and had almost a billion page views last month, around double the number registered by cnn.com. The number of page views of Ole, the biggest Spanish portal, is around 35 million a month.
At the end of last year, Brazil was number 14 in the list of the countries with the largest number of web addresses, ahead of such countries as China and Korea. Some consultants believe that at this pace, Brazil can soon reach the Fifth or sixth place. There are now 175,000 registered Brazilian sites. Every day, 200 new sites are being registered, 6,000 each month. By the year end there should be about 250,000.
The volume of business done on the web is still low, around $160 million in 1998, 88% of the e-commerce in Latin America, but the potential growth is attracting huge investment.
The booming Brazilian web and the high salaries offered to employees are attracting many young executives to quit traditional jobs and join internet companies. According to one estimate, 100,000 direct and indirect jobs have been created since the First local site was created in Brazil in 1993. This year the number is set to double. About 30 new jobs are being created by internet companies every working day.
But the big money is being made by entrepreneurs. Student Edgar Nogueira, 16 years old, has created a search site, Aonde (www.aonde.com.br) and is negotiating to sell it to investors for $10 million. Nogueira started his site in 1997 in his room in an apartment in Rio de Janeiro, where he lives with his sister and parents.
Last year his revenues were about $75,000 and this year they are expected to grow to $200,000.
There are still plenty of opportunities in the Brazilian web, mainly in the business-to-business area. Although in many countries business-to-business has grabbed the lion’s share of revenues, in Brazil most of the commerce done through the internet is still concentrated in the business to consumer area.
Some analysts think that with the growth of the free access portals, the traditional portals will have to rethink their business model, which is based on subscription revenues.
They will have to migrate to a model based more on advertising.
The next development to further enlarge the web in Brazil is an increase in the number of PCs, estimated at around 8 million. And for that to happen it will be necessary to lower the price of the equipment and oVer easy Financing terms to make them available to the Brazilian lower middle class. Although Brazil is moving ahead fast, there are still no portals giving PCs to subscribers almost for free as in the US.
