The Economist explains: Why is Brazil so expensive?

The Economist explains: Why is Brazil so expensive?

Sep 30th 2013, 23:50 by H.J. | SÃO PAULO

TRAVELLERS have long known that the richer a country, the more likely a visit is to burn a hole in their wallets. A recent survey by Tripadvisor, a travel website, put Oslo, the capital of super-rich Norway, as the world’s priciest destination, with a one-night stay in a four-star hotel with dinner and drinks for two costing more than $600. But near the top of the sticker-shock rankings is a surprise entry: upper-middle-income Brazil. Hotels in São Paulo, the business capital, or beachside Rio de Janeiro, cost more than in London or Zurich. Visitors who go window-shopping will find the high prices hit locals too. Clothes, cosmetics, electronics and cars are all more expensive, sometimes much more, than in most other places. The Economist’sBig Mac Index finds Brazilian burgers are dearer than everywhere else except in three much richer countries, (Norway, Sweden, Switzerland) and one dysfunctional one (Venezuela). So why is Brazil so pricey?special report in this week’s issue explores the question in more detail. A big part of the answer is currency appreciation, caused by economic stabilisation in the 1990s and a huge increase in commodity exports since then. A decade ago a dollar bought 3.5 reais; it now buys less than 2.3 reais—which understates the scale of the change, since Brazil’s inflation was much higher, so reais should have become cheaper, not more expensive. For Brazilians, though, currency appreciation has actually made life cheaper by cutting the price of imports. They point to the fabledcusto Brasil (Brazil cost), as the country’s value-for-money problem has long been known. IMF figures show that in most poor and middle-income countries, money goes further than market rates would suggest because wages are lower and non-tradable goods are cheaper. A Mexican’s spending power, for example, is 45% higher at home than if he bought dollars and shopped across the border. But a Brazilian can buy little more at home than he can in the United States.

The custo Brasil has many ingredients, including high taxes (36% of GDP, way out of line with the 21% average for upper-middle-income countries), swingeing import duties and rigid labour laws that make it hard to use workers efficiently. Poor roads and a limited rail network push up freight costs. High interest rates mean firms must spend a packet on financing; high crime adds heavy security costs to their overheads. A terrible education system makes Brazil the world’s second-hardest place for firms to find the skills they need, according to Manpower Group, behind only ageing Japan. Soaring labour costs, which have doubled in a decade as big hikes to the minimum wage set the tone for pay negotiations across the board, have added a new ingredient to the old recipe.

Big price differences mean imports are increasingly taking market share from locals and even Brazilians of relatively modest means have taken to stocking up on foreign shopping-trips. A recent weakening of the currency will give local manufacturers some breathing space, but in the long term the only solution is to become more efficient. The World Bank’s annual report on doing business in a range of countries reads like a productivity to-do list for Brazil: make it simpler to start up and wind up companies; cut and streamline taxes; increase domestic savings and investment. A recent study by the Boston Consulting Group estimated that three-quarters of Brazil’s growth in the past decade came from adding more workers and only a quarter from productivity gains. With few more workers to add, the only way Brazil can start to grow once more is by using the ones it has much better—and becoming cheaper again.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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