Brazil: A developing country rich in opportunities for international trade
Brazil, with almost 195 million inhabitants, is the largest and most influential country in South America, and the fourth largest in the world. Brazil borders every South American country except for Chile and Ecuador. Its Atlantic Ocean coastline measures almost 7,500kms.
Sao Paulo, the biggest city in South America, is Brazil’s economic and cultural hub. Most financial centres are based on the Avenida Paulista. The current economy of Sao Paulo is going through a deep transformation, and focuses mainly on the tertiary sector. Headquarters from big multinationals are not only based in Sao Paulo, but also in Rio de Janeiro, the second largest city in South America. The downside of these cities is that a third of the entire population still live in favelas (slums).
The country is known as an economic giant with one of the biggest democracies in the world, and is part of the Big Four, also known as BRIC. The economies of Brazil, Russia, India and China are all at a similar level with regard to new economic developments. When South Africa joined BRIC in 2010, it resulted into the name change to BRICS. In 2011, BRICS was founded; an independent international organisation encouraging cooperation in many different fields. The primary purpose is an improvement of the global economic situation, and these five developing countries could eventually become more involved in global affairs. Because these countries are very prominent with regard to different rankings (political, social, and economic), it is predicted that by 2027, they will take over the current G7 countries.
Brazil is the fastest growing country in Latin America, with an annual growth rate of 7.5% GDP, and at the moment the sixth biggest country in terms of GDP. It also has one of the biggest social inequalities in the world. When looking at the Lorenz Curve of Brazil, major distortions can be found. This Lorenz curve represents the distribution between different countries income. The country is facing destitution and moderate levels of unemployment, currently at 6.7%, and is expected to increase to 7% by the end of 2013. In addition, crime and violence is a consistent problem. The public debt represents more than 60% of Brazil’s GDP, and to reduce this the government created a plan for accelerating growth.
The fact that Brazil is hosting the FIFA WORLD cup in 2014 helps reduce the level of unemployment by creating jobs in the challenged sector of infrastructure. Furthermore, Brazil will host the Olympic Games in 2016, which should further stimulate the economic growth and reduce the unemployment rate.
Brazil possesses copious amounts of natural resources, and has the capabilities to become self sufficient in terms of oil in the near future. The economy is greatly diversified and the country has a wide range of export products. Brazil is the world’s number one producer of sugarcane, oranges and coffee, one of the main producers of soy and the fourth largest exporter of timber, attracting multinationals within the food industry and bio fuels. Agriculture contributes 6.6% to the GDP, but represents 40% of the total export. The tertiary sector consists of 66.6% of the GDP.
The country also has a great industrial sector contributing more than 25% to the GDP. The rapidly expanding sectors in Brazil are automobiles, computer software, computer equipment and tourism.
Mainly due to the financial crisis, the figures regarding foreign trade show that both import and export levels dropped 21% in 2009 compared to the preceding year. However, 2009-2010 saw figures increasing again. As the Brazilian economy will expand within five years, the currency, the real, will also appreciate, which could lead to a decrease in exports. Forecasts have been made that imports will increase because of a strong real. Eventually, this will result in the widening of Brazil’s current trade deficit, presenting good opportunities for companies wishing to export to Brazil.
Foreign trade in Brazil represents 25% of the total GDP, a surprisingly low percentage; nevertheless, the country is placed in the top 20 of world exporters. The main trade partner countries are China, the US and Argentina with 15.2%, 9.6% and 9.2% respectively. Brazil has an outstanding performance in the field of foreign trade; in 2011 they recorded a trade surplus of US$30bn, an increase of almost 50% over 2010 the largest trade surplus recorded since 2007.
Brazilian consumers in general have a high brand loyalty. The wealthier consumer values things like quality, customer relationship management and social commitment of a company. They possess similar consumer behaviour traits to that of Europeans and North Americans. Even though national is important and is often is reflected in their consumer behaviour, Brazilians are more likely to buy foreign products to show off their wealth. These products often consist of technological equipment. The consumer also has become more selective and demanding. Despite the fact that they have one of the highest interest rates in the world, almost everything in Brazil is bought on credit. Some stores therefore offer to spread the payments and sometimes without any interest charged.
In Brazil, taxes are more than 33% of the GDP, one of the highest taxation rates in the world. The majority of the population consists of poorer social classes and socialism plays an important role for politicians when elections are being held. A large portion of all the tax money collected will be used to improve the life standard of the poorer inhabitants. The majority of the underground economy evades taxes and this causes a distortion within the business environment. As a result, profits will drop for businesses that play by the rules because they have to compete with competitors that evade tax. Due to the financial problems in 2009, Brazil put restrictions on 60% of all imports to protect the domestic market. This is contradictory, as Brazil advocates free trade when exporting raw materials and does not embrace the imported products.
The main reason for taxes being so high is that the value per capita that Brazilians produce is not sufficient for the government to solve all the challenges the country faces, both social and economical. As there is no institutional solid base in the country, taxes will remain high.
The worth of foreign direct investment (FDI) became four times as high between 2005-2010. Brazil is the leading destination for FDI in Latin America and the fourth largest investor in emerging markets.
Several factors that enhance the attractiveness of the country for international investors are the total worth of the market (nearly 200 million), the convenient accessibility to raw materials, and a booming and diversified economy that leaves Brazil less vulnerable to an international financial crisis.
The finance, oil, gas, beverages and telecommunications sectors attract the most FDI. The main investors are the US, Spain and Belgium with 15.8%, 12.9% and 7.6% respectively.
Low labour costs and an abundance of raw materials are also reasons why businesses would like to invest in Brazil. Furthermore, Brazilian universities have good educational levels and are well renowned internationally.
There are also several administrative barriers that hinder international trade. In some sectors, the real loses competitiveness against Asian competitors when valued against the US$. A sector that has the fewest investment opportunities is textile, mainly because of the low labour costs of its Asian competitors.
The Brazilian government actively promotes FDI and has removed most of the barriers related to foreign investor activity. Numerous sectors have been deregulated over the past 15 years, and a large number of companies have been privatised. They also encourage FDI in the form of tax exemptions, tax incentives and aid. The government implemented a protectionist trade policy that guaranteed the profitability of foreign direct investments. These measures resulted in an increase of inward flow of 22,489 in one year (from 25,949 to 48,438 in 2009 and 2010 respectively).
As the investment regime in Brazil is a liberal one, a foreigner is allowed to have a majority interest in a company. FDI could therefore be an interesting opportunity for entrepreneurs to expand their businesses abroad.
The country is based on a parliamentary democracy. For citizens aged between 18-70, it is a duty to vote. Brazil’s current president is Dilma Rousseff, the first woman to be elected as a president and the successor of Luiz Inacio da Silva. She is the head of state and head of government. In 2003, she joined the government as the minister for energy. Roussseff stated that she represented continuity within the Lula government, under which many Brazilians saw their wealth increase due to the improved economic conditions. She favours a strong state role in areas like banking, energy and oil.
The national congress (or parliament) consists of two houses. The first house is the Senate (81 members) and the second house is the Chamber of Deputies. In total there are 15 political parties represented in the parliament. The proportion of seats of a given party changes regularly because of its politicians (who change parties or new politicians who join a party).
Brazil also has various political cultures throughout its different regions. Politics in the north and northeast are more dependent on political generosity than states in the south of Brazil. This is related to the history of the southernmost state, Rio Grande de Sul. There have been three civil wars in this state, and the state has been involved in numerous political conflicts in the Rio de Planta areas. As a result, political parties don’t have much penetration in the State of Rio Grande de Sul.
The business culture in Brazil seems to be more open than in Europe. Personal contact is highly valued in Brazil, and the first contact is often initiated by an e-mail followed by a telephone call. Relations become friendly very quickly, and physical contact is common even embracing each other is common when you know each other well and deep and long lasting relationships are more appreciated.
Brazil is a goldmine of opportunities for investors, importers and exporters alike. For more on Brazil, head over to the Brazil portal on GlobalTrade.net. With over 400 articles and qualified service providers listed on the Brazil page alone you’ll find all you need for your business operations in Brazil.
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