WHY EVERYTHING COSTS SO MUCH IN BRAZIL* *Traduo: David Coles They asked the winner of reality show Big

Brother Brazil what he was going to do with his million Reals? Im going to buy a flat in Brasilia. And what about the rest? Ill take out a mortgage on the rest from the government savings bank! That joke has been doing the rounds in Brasilia for a while. But it could apply to anywhere in Brazil. Since 2008, just to take the example of So Paulo, real estate has risen 163%. In real life Monopoly, R$ 1 million is the new R$ 380,000. The cost of a square meter in the cities of So Paulo and Rio is already among the highest in the world. And in the more upscale neighborhoods, Big Brother will no longer cut it: a 100 m apartment in Leblon (Rio) will set you back exactly what you would pay in Paris R$ 2 million. Penthouses are already being advertised for R$ 20 or 30 million. And on the streets, the same law applies. The Brazilian Big Mac is the worlds fifth most expensive. While the inhabitants of Tokyo pay the equivalent of R$ 7 for one, here in Brazil we have to fork out R$ 11.25and Japan is not exactly a country known for its low cost of living. In Paris, also absent from the list of the planets most affordable cities, you will pay R$ 25 for a leg of duck, at Chartier, a renowned restaurant in the citys most charming neighborhood, Montmartre. Here in not-quite-so-charming So Paulo, the same piece of duck can cost you up to R$ 70but this is no super-duck, it hasnt flown all the way from Montmartre to Vila Madalena. Lets take a look at another bird: poultry. Chickens do fly. Not all the way to Europe, though. They sail there frozen, inside container ships. From here to Europe. Brazils poultry population is virtually the same as Chinas human population (1.26 billion, according to official statistics office IBGE). Brazil is the worlds largest exporter of chicken. After slaughter, some of the flock finds its way to Germany. Some of our feathered friends may end up at Grlitzer Park, where Berliners queue up to buy halbhhnchen (half-chickens). With French fries, R$ 9.50. But in Brazil half a chicken costs nearly R$ 20. And dont expect French fries. Its not only the chicken that we ship out that is sold cheaper overseas. We also export cars. A VW Gol leaves the factory in So Bernardo do Campo (SP) and embarks on a cargo ship to Mexico. Over there, the basic version is a 1.6liter four-door air-conditioned model. A Gol like that costs R$ 37,000. Doa Florinda and Professor Girafalde (from kids sitcom El Chavo) will hand over R$ 23,000 for the same Nuevo Gol. And if their friend Quico throws a tantrum and demands a cooler set of wheels, he might set his sights on a Camaro. It would cost him R$ 65,000. To buy it in Brazil would cost R$ 190,000. He could pocket the difference and spend sixteen months at the Las Brisas Acapulco, one of Mexicos plushest hotels. But wait till you see the difference between really expensive car: the classiest convertible ever built will come onto the Brazil market in 2013. The Lamborghini Aventador LP 700-4 Roadster. Its price tag here is likely to be as long as its name: R$ 3,000,000. At least three Brazilians have already booked theirs. Hey there, Eike Batista: hold your horses and spend the same R$ 3 million in the United Statesyou can take home a helicopter, buy an apartment in Manhattan and still have enough left over for the very same Lamborghini! Would you believe it! And how about an apartment in So Paulos swanky Jardins neighborhood then, a snip at R$ 30 million? Five suites, room for eight cars in the garage Wow. For that money you can buy a chateau in France (R$ 14.4 million), a quinta in Portugal (R$ 8.6 million), a farm in Italy (R$ 3.4 million), a penthouse on the Spanish coast (R$ 2.2 million) and a chalet in the Alps (R$ 1.4 million). With enough left over for a snack. Better still if its a Big Mac. (Costs less in all these countries). Come to think of it thats exactly what Brazilians have been doing: spending their money in other countries. Y ou know: i-Pads, baby trousseaus, make up Everyone comes back fully laden. The shop assistants in Miami already speak better Portuguese than we do. Which is hardly surprising: the money Brazilians spend overseas is the fastestgrowing economic factor in the country. Our GDP is bogged down, but the amount of cash we spend overseas is soaring sky-high. We spent US$ 10.9 billion in 2009. The latest figures are US$ 22 billion. Thats a growth of 19.5% per year. In the same period, GDP grew only 2.7% per year. In other words, we are consuming other peoples GDP, since our own is way too expensive. But why is it way too expensive? Because Brazil won the lottery (or Mega-Sena as its called). And is squandering all its winnings in the bar. The miracle of credit We won the Mega-Sena in the early years of this century. In the five years before the 2008 crisisfrom 2003 to 2007 the planets Gross Domestic Product grew at an average of 5% a year: China hit heights of 11%, 12%, and then 14%. The world economy is enjoying a phase of exuberance even greater than in the golden years of the 1960s, wrote BNDES economist Fabio Giambiagi at the time. Gross Domestic Product is a figure measured in terms of money. But the GDP is not money in itself. The GDP represents concrete things. Chinas GDP growth, for instance, meant the construction of 1,500 thirty -story buildings per year, nationwide. Shanghai, which had had no underground railway system until 1995, built 454 kilometers of trackmore than London (402 km), New York (337 km) and So Paulo (74 km). A new world was being born from nothing. Brazil surfed the trend, selling raw materials to the rest of the world. Above all iron ore, oil and foodstuffs commodities, as economists call them. From the early 1990s to 2002 we exported on average US$ 54 billion per year. From 2003 to 2011, this average tripled to US$ 155 billion. Unsurprisingly, this was exactly the time when 40 million Brazilians clambered out of poverty. And joined so-called social class C. Another nine million exchanged class C for classes A and B. All this because export money greased the wheels of our economy. This is how it works: imagine someone who made a fortune in iron ore such as a top executive at Brazilian mining company Vale. On retirement, he gathers up all the money he made in the golden years and opens a pizza restaurant chain. The manager of the pizza restaurant decides to buy a new car. The owner of the car dealership buys a copy of SUPER-INTERESSANTE and thus we all take a dip in the Olympic swimming-pool full of cash we have built in the news room. The wheels of the economy turning. In itself, this is enough to explain the real estate boom. The pizza restaurant manager, the car dealership owner, the editorial staff of SUPER-INTERESSANTE: no longer do ordinary Brazilians have to win the draw in the popular Ba da

Felicidade housing raffle in order to nurture the dream of owning their own home. They feel they can do it by themselves and go into the market for an apartment. But new buildings dont grow on treesand, as Mafia boss and real estate investor Tony Soprano might have put it, God aint creating new plots of land out there. Emilio Haddad, lecturer at the University of So Paulo and engineer specializing in real estate, agrees with Tony: Urban plots of land are thin on the ground in Brazil. Short supply clashes with the appetite of purchasers. The price of real estate virtually stagnant for ten yearsbegan to rise. But what happened next? It got easier to buy an apartment! Not harder, as you might logically have supposed. The economy has its own logic: banks start loaning more when the real estate market heats up. Bankers feel protected. If a borrower defaults, the bank will be able to sell the apartment at a much higher cost than they originally paid. Imagine this situation: someone takes out a loan on a R$ 380,000 apartment in So Paulo in 2008, and then loses his job. He can no longer keep up the loan installments. What happened to the bank that made the original R$ 380,000 loan? The bank turns around and sells the apartment for R$ 1 million, of course. Beautiful. Easy money, come rain or come shine. Bank managers have a welcoming hug for everyone. Banks hardly seem like banks any more That was the miraculous multiplication of credit. Housing loans accounted for 1.5% of GDP in 2007; 5.5% in 2012. Ten years ago R$ 4 billion were sloshing around the financial system in the shape of real estate credit. Today its US$ 100 billion. Demand was already overheated, but with the stampede to credit, it spontaneously combusted. That was when all the architects began including gourmet dining balconies in their apartment blueprints. Rio, So Paulo, Brasilia, Recife, Fortaleza, Belo Horizonte Since 2008 the value of a square met er in all these state capitals has risen faster than inflation 25%. The increase was 200% in Rio, since not even God can increase the amount of space available in the Leblon neighborhood. Not to mention that the price of cement, steel and everything else that goes into the construction process has also risen. Anyone who has recently remodeled their home has come up against a new phenomenon: mortar the price of gold. The new legal tender among the building fraternity has become the two grand. How much will it cost to mend this wall?Two grand. What about the piping?Oh, another two grand. Like we say, this phenomenon begins to explain the rise in real estate prices. But it doesnt explain everything. There is another reason behind the increases, which is less glamorous than the swimming-pool of export money: our sluggishness. The Brazil Cost Without abandoning the construction analogy we can understand our leaden-footedness. In Brazil the most typical construction method remains the same as in Mesopotamia in 8,000 BC: brick-layingbuilding walls brick by brick (or slab of concrete by slab of concrete), tying it all together using mortar. Overseas you will find more prefabricated material being used: a factory makes concrete (or ceramic) panels. The panels leave the factory, are transported to the building site, and the workers assemble the building as if it was a giant Lego. Everything slots together. Whereas in Brazil a project involving two 35-meter towers will require up to 1,500 workers and take 42 months to complete, Americans can build such a project in 30 months with half the number of workers, said Alessandro Vendrossi, director of construction company Brookfield in a recent interview given to EXAME Magazine. And in China, using much more pre-molded material and some devilish logistics, 30-floor buildings can be raised in a fortnight. Take a look: If we could do that in Brazil, the supply of new buildings would keep pace with any imaginable demand. And the price of real estate would not have gone through the roof. Or at least would not have soared so high. So why is there nothing like this in Brazil? Because entrepreneurs and government spend too little on improving their means of production, and fail to invest as much as they ought to in more modern machinery and new factories (such as concrete panel factories). In China, this type of investment represents 48% of GDP. Half of what the country produces is intended precisely to enable it to produce more. One third of the steel made by China in the golden age, a considerable amount of which used Brazilian ore as raw material, went into building new steel mills. In Brazil, the profits from the ore went into buying Land Rovers and refurbishing penthouses overlooking Rios picture-postcard Lagoa de Freitas. Investing in further means of production is excellent because it reduces costs downstream. That is GDP generating further GDP. Mortar wont end up being worth its weight in gold because Brazil will have learned how to produce more and better mortar (or prefabricated panels). This would avoid a two grand culture ever coming into being. Prices wont border on the irrational. They cant. The technical name used by economists for this type of expenditure is, unsurprisingly, investment. And theres a very simple rule behind it: the less developed a country is, the more it needs to spend on investment. Emerging nations invest on average 31% of their GDP. Mongolia, Chinas new commodities supplier, 51%. Brazil, 19%. Which is the same as Egypta country that only truly spent on investment when it built the pyramids. Long term investment On the other hand, nations that have been developed for some time can afford to spend little on investment: Switzerland, Belgium, Finland These countries also belong to the 19% club, but they are now very industrialized. And this is not our case. Nor will it ever be, if we continue to invest little. Lack of investment is the explanation underlying the Brazil costthe fact that producing in Brazil is more expensive and more painful than in developed countries. Take railways. Railways are a textbook case of investment: they are expensive, but bring long-term returns, making freight cheaper. Brazil has 29,800 kilometers of railways. Ten thousand kilometers were built under Dom Pedro II. Our railway lines today do not reach the places that need them most, such as the soy-producing regions of Mato Grosso. Soy has to be hauled by truck most of the distance to the ports. Result: while the transport cost per ton of soybean is the equivalent of R$ 35 in the USA, it is R$ 160 in Brazil. And China (again!) added a quantity equivalent to half of Brazil in railways in the period between 2007 and 2011 alone: 19,000 kilometers. Today China has 98,000. It comes third only to the United States and Russia, two other countries as vast as continents, where railways are the lifeblood (226,000 kilometers in the USA and 128,000 kilometers in

Russia). Some other countries as vast as continents: Canada: 46,000; Australia 38,000; Argentina: 36,0007,000 more than Brazil. Ho hum. Without a decent railway system, transportation costs will skyrocket. And these costs are built into the price of everything. Transporting a car from a factory in So Paulo to a dealership in Salvador (1,900 km) costs four times more than transporting the same car from Shanghai to Beijing (1,200 km). In the golden noughties, China was building two new thermal electric power plants per week. Brazil, bless ed by God, and hydro-electrical by nature, failed to concern itself with energy. And were now paying the price for this via the Brazil cost. For example, it costs approximately R$ 30 in electricity to produce one tonne of cement. This may not seem very expensive, but consumption of cement in 2011 came to 65 million tonnes. An electricity bill of R$ 1.9 billion. Industrial energy is 55% cheaper in the United States than Brazils was up until 2012. In other words: producing the same amount of cement in the US used to cost R$ 1 billion less in electricity alone. Why did it use to be so expensive? Because the energy utilities were handed highly favorable contracts sometimes with annual readjustments in line with the General Market Price Index (IGPM), the inflation index that was invariably burlier than the statistics offices Broad Consumer Price Index (IPCA). Until last year, being a stockholder in an energy company was a real silver-spoon business: loads of profit and no headaches bothering with any of that investment. So much fat had been accumulated that the government renegotiated its contracts with the energy companies. The residential rate fell by 18% and the industrial rate by 32%, according to energy watchdog ANEEL. Amazingly, the world did not come to an end, nor was Brazil plunged into darkness. But our industry still pays an energy bill 33% larger than in the USA. We still have a lot of investing to do in this segment. However, theres another input that costs a lot of money: money itself. Thats rig ht. A loan for working capital (what entrepreneurs use in order to pay their day-to-day expenses, such as payrolls) costs an average interest rate of 19% per year. In Chile the rate is 5.8%. In China 3.7%. In Germany 2.5%. In the USA 1.1%. You could go from here to the end of this article just listing the countries where money is cheaper. Courtesy of our banking spread. This is what the spread is: banks also borrow money. Sometimes they even borrow it from you. For example, when you invest money in a CDB, you are lending money to the bank. The difference between the interest rate the bank pays you when it borrows from you and the interest rate it charges you when it lends you money (in the form of credit for working capital, for example) is the spread. Brazils spread is the largest in the world. An ancient vice of a banking system accustomed to pornographic interest rates. Your credit card is living proof of this. As are the high prices: FIESP states a) that at least 7.5% of the final price of any product is down to the interest rates banks charge; and b) that industry spends R$ 156 billion annually just to pay these interest rates. The same amount that the BNDES loans every year to promote the economic and social development contained in the acronym that is its name. One thing cancels out another. Our high interest rates, our expensive electricity, and our nineteenth-century logistics are brake pedals holding back the GDP. Whereas they are gas pedals for high prices. However, let us not forget the afterburner of prices: our friends the taxes, always with us. Fiscal bedlam In 1821, Dom Pedro, recently appointed Prince Regent, found himself in a pickle. Brazil was bankrupt. To reverse the situation, one of his first measures was to abolish taxes on salt and on coastal shipping, which were making it expensive to produce jerked beefone of the major items in the economy of the time. Youre right, even in those days excessive taxation was a burden! As you know, Brazilians pay a great deal of tax. The country ranks 75th in GDP per inhabitant. But 14th in the heaviest tax burden table: 36.2% over GDP. But it gets worse. If our tax burden was a person, it would be one of those dodgy boyfriends, full of entanglements and unconvincing alibis. Brazilian taxes are so complicated that companies devote 108 days every year just to prepare, record and pay tax. We rank 130th in the World Banks bureaucracy league table (which is upside down: the lower down the list, the more bureaucratic is the country). Franz Kafkahad he hailed from Brazil rather than Praguewould have found much to write about (the Czech Republic, as it happens, is blowing us a kiss from 65th position). The average, in developed countries, is one week to take care of the paperwork. I have heard owners of multinational companies say that their tax teams are ten times larger in Brazil than overseas, says Fernando Pimentel, director of the Brazilian Textiles Industry Association. It is fiscal bedlam. Companies waste one third of their year dealing with taxes. There are 88 federal, state and municipal taxes, ranging from retirement contributions to garbage rates. Plus the rules change constantly: 46 tax rules are edited every day. Every 26 minutes, the Inland Revenue comes up with a new rule. Take a look at your shoes. If they are Made in China, they will have cost approximately US$ 5 when they landed at the Port of Santos. From that moment on the price rises. First of all, there is the Importation Tax (Imposto de Importao or I.I. to use its Brazilian acronym), a federal tribute of 35%. in the case of shoes. Then there is a Valueadded Tax on Goods and Services (ICMS), levied by the states of Brazil (at a different rate in each one). This operation is not exempt from the well-known Social Integration Program (PIS) and Welfare Financing Tax (COFINS). The Social Integration Program (PIS) was set up to feed into a pool for paying unemployment benefit. While the Welfare Financing Tax (COFINS) levies for investment in health, pensions and welfare. For shoes, these taxes come to 9.1%. There is also an exclusive COFINS rate for imported goods, and in the case of Chinese shoes, a surtax of US$ 13.85 for every pair landed in Brazil. A government anti-dumping measure. In other words, it helps prevent the extremely low prices of Chinese footwear damaging Brazils footwear industryas well as giving the industry breathing space not to be forced to lower its profit margins because of competition. OK. However, if your shoes were made here, thats different: 12% ICMS and 9.25% PIS/COFINS. Plus 3.4% Income Tax and Social Contribution On Net Profit (CSLL), another tax created in order to be plowed into health, pensions and social welfare. Then there is 0.04% Financial Transactions Tax (IOF). And spending on employees: The Government Severance Fund (FGTS), a savings account managed on your behalf by the government, in case you are wrongfully dismissed. And the Social Security Tax (INSS), which will pay your meager pension one day. All together it comes to 6.5%. The shoes thus come off the production line costing R$ 59, according to the cost manager of a large factory, who preferred not to be identified. Tired yet? Because weve only been talking about industry. In the case of retail, the taxes levied are ICMS, PIS and COFINS, as well as the Services Tax (ISS), collected in each municipality (and ranging from 2% to 5%). But dont worryit gets worse. If you simply add up the percentages of the taxes, well, the sum doesnt add up. Because some taxes are collectible on other taxes. And this will depend, for example, on whether the company pays

tax on forecast profit or actual profit. And thats how prices get the way they do. Take Easter eggs: 38.5% of the amount charged is taxes. A whopping 43.7% in the case of imported salt cod ( bacalhau). And that is why more and more people go shopping overseas: a Samsung Galaxy SIII will cost you R$ 650 in Miami. But in So Paulo, you cant find one for less than R$ 2,048. The taxes are at least partly to blame: there only 7%, here virtually 40%. Economists, politicians and the business community are crying out for tax reform in order to cut through this knot. Most of the specialists heard by SUPER-INTERESSANTE suggest taxation should migrate from consumption to equity; in other words, that taxation should affect profit and income, rather than labor, production and consumption. And that makes a great deal of difference. Most of what we pay in tax today is for billings [everything that comes into cash], rather than profit, says Joo Eloi Olenike, president of the Brazilian Institute for Tax Planning (IBPT). In other words, traders have to pay hefty taxes even when operating at a loss. This is a massive stimulus for free initiative except that it works backwards. While waiting for the reform, some sectors of the economy have been entering into sporadic agreements. Last year for example the automobile industry was the beneficiary of a reduction in the Tax on Industrialized Products (IPI). Result: sales of vehicles rose 4.6% over 2011and the IPI became a poster boy for car advertisements. Wait a minute though. Taxes cannot explain everything by themselves. Nor can the Brazil cost. There is another factor to be taken into consideration: the Brazil profit. The Brazil Profit In Mexico, the Honda City is an imported car. Imported not from Japan, but from the town of Sumar, upstate So Paulo. Scores of Honda Citys leave the Honda factory near Campinas, are shipped to Mexico, and sold there for R$ 33,500. The same model, from the same factory, costs R$ 53,600 in Brazil. The Brazil cost cannot explain the difference, since the car is made here, running the gauntlet of penury that producing in Brazil entails. There are the taxes. In Brazil, 36% of the final price of the car is tax. So if you strip away the taxes, the City would cost R$ 34,000. All right. But Mexico itself is no fiscal Garden of Eden. Taxes are the equivalent of 18% of the final price of a car. So if we strip a City of its Mexican taxes, it would cost R$ 27,500. In other words: even if we rule out taxes, the Brazilian City still costs R$ 6,500 more than its Mexican counterpart. The same goes for the VW Gol. In Mexico it is a car imported from Brazil, except that the basic model in Mexico is much better than our domestic model (which is 1.0 liters, two doors, no air conditioning). However, let us only compare models with the Mexican configuration. Ignoring tax on either side, as we did with the City example, the Brazilian Gol sold in Mexico is still R$ 4,500 cheaper than it is in Brazil. Conclusion: profit margins are larger in Brazil than in Mexico. But theoretically they should be smaller: Brazil is the worlds fourth -largest automobile consuming market, only lagging behind China, the USA and Japan. It is easier to gain scale (and sell at a lower price) than in Mexico. Our market is four times larger than theirs. Wait a minute though. It is more expensive here, even when we correct for taxation and the Brazil cost. The Brazilian Association of Carmakers (ANFAVEA) defends itself. The Association says it cannot discuss prices outside the realities of the market in a competitive environment like Brazil where there are over one thousand models on sale, counting domestic and imported vehicles. Well, all right. Perhaps the problem lies in those realities of the market. In this reality, it has become acceptable to spend R$ 100,000 on a car, even though it eats up a sizeable chunk of a persons salary. The truth is that the already-high prices exert a magnetic force. Brazilians love spending and showing off their purchases. It confers status. So much so that stores that are affordable in Europe, such as Spains Zara or Britains Topshop, have become trendy and upscale here. The rule of thumb in Brazil is to spend a lot and save very little. According to research institute Nielsen, Brazilians put away 27% of what they earnas against an average of 39% in the rest of Latin America. Last year we consumed nearly 10% more than in 2011, above all in car dealerships (30.3%) and supermarkets (28.8%). This is not bad in itselfin Japan, people spend little and save much, but their economy is stagnant. But if production does not keep pace with demand, theres no escaping it: prices will rise. Another problem is we get deep into debt. A recent IBOPE survey showed that 41% of Brazilians have debts. Among Germans, for instance, this figure is 10% (which is an all-time high for the country). We have never had so much credit, and lacking financial education, we think: Theyre giving me all this money, Im going to spend it, says economist Samy Dana, of the Getlio Vargas Foundation. Gustavo Loyola, former president of the Central Bank, says people are not used to dealing with this. Candies are great, but eat too many of them, and you get yourself all sticky. We actually have a good excuse. Not so long ago, in 1993, inflation measured by the government came to a staggering 2,477%. Every fifth of the month Brazilians would flock to the supermarkets to stock up their pantries with rice and beans and their freezers with meat. Because the prices would have been adjusted upwards by the following day. Who could think of saving in that scenario? The main idea was to spend before your moneyor the number of zeros tacked onto itdisappeared. The truth is we have a lot to learn about dealing with money. Enough already, says Getulio Vargas Foundation economist Virene Roxo Matesco. Inflation was tamed in 1994. There is a whole generation of consumers who dont know what inflation is, she adds. People have no idea of the cost-benefit of saving. Shes right. We will learn sooner or later. However, if government and business fail to cooperate, investing more in production and cutting excess taxation, little can be done. And we will go on thinking that fair prices are an overseas tourist attraction.