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Cablegate: Brazil Trails in World Bank's "Doing Business" Rankings

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DE RUEHSO #0685/01 1711228
ZNR UUUUU ZZH
P 201228Z JUN 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 5285
INFO RUEHBR/AMEMBASSY BRASILIA 6384
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC 2489
RUEHRC/USDA FAS WASHDC 0617
RUEHMN/AMEMBASSY MONTEVIDEO 2036
RUEHBU/AMEMBASSY BUENOS AIRES 2309
RUEHSG/AMEMBASSY SANTIAGO 1765
RUEHLP/AMEMBASSY LA PAZ 2863
RUEHPE/AMEMBASSY LIMA 1022
RUEHCV/AMEMBASSY CARACAS 0343
RUEHBO/AMEMBASSY BOGOTA 1405
RUEHRG/AMCONSUL RECIFE 2991
RUEHRI/AMCONSUL RIO DE JANEIRO 7198
RUEHAC/AMEMBASSY ASUNCION 2633
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 02 SAO PAULO 000685

SIPDIS

DEPT FOR WHA/BSC, WHA/EPSC, EB/IFD
STATE PASS TO USTR FOR MSULLIVAN
STATE PASS EXIMBANK
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
NSC FOR SUE CRONIN
USDOC FOR 4332/ITA/MAC/OLAC
USDOC FOR 3134/USFCS/OIO
TREASURY FOR OASIA, DAS LEE AND FPARODI
DOL FOR ILAB MMITTELHAUSER
SOUTHCOM ALSO FOR POLAD

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV PGOV ETRD BR
SUBJECT: BRAZIL TRAILS IN WORLD BANK'S "DOING BUSINESS" RANKINGS


1. SUMMARY: Brazil ranked 119th among 155 countries in the
International Finance Corporation's (IFC) Doing Business rankings,
published by the World Bank. Brazil fared worst in its labor, tax,
and bankruptcy rankings. Unless addressed, doing business in Brazil
may be viewed more in terms of its costs, than its benefits. END
SUMMARY.

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UN-DOING BUSINESS?
------------------

2. UNFLATTERING FIGURES: Concerned about their performance in
comparison to India, China, and other large developing countries,
many Brazilians were surprised that the IFC study showed Brazil as
more corrupt than China, and its judicial system as worse than
India's. The report warned that corruption, the onerous tax burden,
and high interest rates were the main obstacles to Brazilian
development. Brazil ranked very poorly in its labor, tax, and
bankruptcy practices.

WHAT THE NUMBERS SAY
--------------------

3. THE IFC TOP TEN: The IFC's Doing Business Ranking evaluated ten
indicators and compared Brazil's results with the average
performances of Latin America (LA) and members of the Organization
of Economic Cooperation and Development (OECD).

-- STARTING UP A BUSINESS (RANKED 98/155): Entrepreneurs in Brazil
can expect to go through 17 steps to launch a business over 152 days
on average, compared to an average of 63 days among LA countries,
and an average of 19 days in OECD countries.

-- DEALING WITH LICENSES (RANKED 115/155): In Brazil it takes 19
steps and 460 days to complete the licensing process (LA countries
average 206 days, OECD average 146), at a cost of 184.4 percent of
income per capita.

-- HIRING AND FIRING WORKERS (RANKED 144/155): Brazil is heavily
criticized in terms of difficulty of hiring, difficulty of firing,
rigidity of employment, hiring cost, and firing costs. Firing costs
(measured in weekly salaries) averaged 63 salaries in LA and 35
salaries in OECD countries, whereas in Brazil, the cost of firing an
employee is a mammoth 165 weekly salaries.

-- REGISTERING PROPERTY (RANKED 105/155): In Brazil, it takes 15
steps (compared to seven in LA countries and five in OECD countries)
and 47 days to register property. The cost to register property is
four percent of overall property value.

-- ACCESS TO CREDIT (RANKED 80/155): Brazil is heavily criticized
for policies that inadequately restrict access to credit. [NOTE:
Real interest rates in Brazil are currently above 10 percent, among
the highest in the world. END NOTE.]

-- PROTECTING INVESTORS (RANKED 53/155): Brazil is criticized for
inadequate transparency of transactions (extent of disclosure),
liability for self-dealing, shareholders' ability to sue officers
and directors for misconduct, and weak investor protection laws.

-- PAYING TAXES (RANKED 140/155): Entrepreneurs in Brazil must make
23 payments (versus 16 in OECD countries), spend 2,600 hours of
tax-related preparation (compared with 530 hours in LA countries and
197 in OECD countries), and pay 147.9 percent of gross profit in
taxes (compared with 52 percent in LA countries and 45 percent in

SAO PAULO 00000685 002 OF 002


OECD countries).

-- TRADING ACROSS BORDERS (RANKED 107/155): Brazil is criticized
for its cumbersome import and export procedures. For example, 16
signatures are needed to import merchandise (versus three in OECD
countries), and importation takes an average 43 days to process
(versus 14 days in OECD countries).

-- ENFORCING CONTRACTS (RANKED 70/155): It takes 24 steps and 546
days to enforce contracts in Brazil. The cost of enforcing
contracts is 15.5 percent of debt.

-- CLOSING A BUSINESS (RANKED 141/155): In Brazil, it takes 10
years on average to close a business (compared to 3 years in LA
countries and 1 in OECD countries) at a cost of 9 percent of the
estate value. The recovery rate, expressed in terms of how many
cents on the dollar claimants recover from an insolvent firm, is
0.49 percent, less than a measly half cent per dollar (compared with
28 cents per dollar in LA countries and 74 cents per dollar in OECD
countries).

COMMENT
-------

4. "O CUSTO BRASIL:" Taken together, these factors are frequently
referred to as the "custo Brasil" or Brazil cost. Sadly, these
factors do more than merely complicate doing business in Brazil,
they are also frequently cited as the key factors stifling GDP and
investment growth retarding competitiveness, and discouraging
foreign direct investment. Brazilian business leaders, economic
analysts and some government figures worry that failure to reduce
the "custo Brasil" will mean a loss of markets and investment to
India and China, which are posting consistent gains in exports, GDP
growth, and FDI. END COMMENT.

5. This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN

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