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Brazil’s economy still in the black market

Marketplace Staff Sep 29, 2006

KAI RYSSDAL: It’s not expected to be much of a contest in Brazil’s election Sunday. President Luiz Inacio Lula da Silva — Lula to his friends and everybody else — is expected to win easily. Four years ago he became the first leftist to be elected president in Brazil. And since then he’s expanded social programs and avoided tax increases.

Lula’s also gained a reputation for fiscal conservatism, and won some modest economic growth in a country with a history of economic crises. But critics say Brazil could be expanding much faster.

From Rio, Paulo Prada explains.

PAULO PRADA: The Sahara is a district of several noisy city blocks in central Rio de Janeiro. Though named after a desert, here in Rio it’s an oasis of commerce amid a neighborhood of office towers and dingy government buildings.

You can buy almost anything you want here and the prices are cheap. A pet parakeet sells for about five bucks. A CD of Brazilian funk music sells for four. The latest soccer video game costs less than seven. But most everything here is black-market goods.

Because of heavy bureaucracy and steep taxes, many Brazilian companies operate off the books. And not just in retail. Construction, transport, and much of the service industry is black market, too.

In fact, as much as a third of the economy in this country of 180 million people is believed to exist underground. That amounts to $200 billion, making Brazil’s black market the fourth biggest economy in the Americas, after the U.S., Canada and Mexico.

President Luiz Inacio Lula da Silva likes to boast about booming industrial output, soaring exports, and a gradual increase in worker wages over the past four years.

In a recent TV interview he bragged that Brazil is enjoying the most positive economic outlook in its history. But economists say Brazil’s gross domestic product should be growing by far more than 3 percent, the average for Lula’s first term.

A big hindrance for growth is black market business.

Solange Srour is an economist with Mellon Global Investments in Rio. She says the black market acts as a drag on investment. Legal businesses end up bearing the bulk of Brazil’s tax burden and therefore invest far less in the economy than they otherwise could.

Just ask Marcio Concas. In the evenings he delivers beauty supplies and on weekends prepares for an entrance exam to join the police corps. He and his father recently tried to start a fruit delivery business but gave up. They couldn’t compete with the prices charged by the underground drivers who control most of the routes.

“Those who work outside the system hurt us commercially,” he says. “We who work properly pay more.”

In a recent report the World Bank ranked 155 countries on the ease of doing business in each. Brazil ranked 121st, below countries like Zambia and Nepal. One of the main problems is red tape, which makes opening or closing a business an odyssey that can take years. That drives a lot of people to do business illegally.

Celio Gonçalves sells handcloths and kitchen towels from a bicycle on streetcorners in the Sahara. He says he tried several times to get a small-business license from local authorities, but found it nearly impossible.

“I’d rather operate legally and pay taxes,” he says. “But it’s like the government actually prefers me to work this way.”

If reelected, Lula promises to pursue labor and tax reforms designed to begin reordering the economy. But the problem is so big in Brazil, it will likely remain a menace for many more leaders to come.

From Rio de Janeiro, this is Paulo Prada for Marketplace.

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