Authors: Cássia Almeida, Luciana Rodrigues, Henrique Gomes Batista and Aguinaldo Novo

Source: O Globo, 16/05/2007

RIO, BRASÍLIA and SÃO PAULO. A frequent source of complaints from business owners, labor costs are a smaller obstacle to the export of services than the complexity of Brazilian legislation. Bureaucracy and excessive labor regulations scare away investors, both domestic and foreign, and weaken the country's position in the competition for the international market.

Furthermore, the recent surge in the Brazilian real against the dollar translates to higher wages and, therefore, a direct increase in the cost of labor-intensive companies, such as service providers.

José Marcio Camargo, an economist at PUC who studies labor obstacles in Brazil, states that the main barrier to these investments is not the cost of payroll—even though it represents an additional 67,5% on top of employee salaries for the employer.

According to him, the problem lies in the size of the Consolidation of Labor Laws (CLT): — Brazilian labor is much cheaper than that of developed countries. That's not the obstacle. The difficulty lies in Brazilian legislation, which is rigid in the sense of being very detailed. Contracts have to have thousands of clauses, all legal, that must be respected. This makes it very difficult for companies to design suitable contracts. Thus, it prevents this type of company from coming to Brazil.

According to Camargo, for a contract to be considered fully legal, it needs more than 900 clauses. This type of service provision, says the economist, requires specific contracts: — For example, it is difficult to establish remuneration based on productivity.

Cláudio Frischtak, a former economist at the World Bank and now at Inter.B Consultoria, points out that the government recently adopted measures to reduce the tax burden on investments, such as cutting taxes on the production of machinery and equipment, but has not made progress in reducing the tax burden on labor.

"The tax component in Brazilian labor costs is very large. In the case of services, we are exporting taxes. It is very difficult to compete with an appreciated exchange rate and a high tax burden, which is heavily levied on labor," says Frischtak.

And changes to labor laws are not on the current government's agenda. The union reform, submitted in early 2005, is still being processed in Congress, and the labor reform, according to what the Minister of Institutional Relations, Walfrido Mares Guia, said yesterday in Rio, will still be discussed with society.

Politec, a company with 37 years of experience that exports services in the field of information technology, feels the weight of taxes on its international operations.

According to the company's Director of International Business, Humberto Ribeiro, Brazil needs a strategy in the sector to avoid falling too far behind competitors like India and Mexico: "Brazil arrived late to this market, and we still suffer from a lack of equality, especially in taxes and labor costs."

Time zone difference works in favor of Brazilians. Among other services, Politec manages the registration for Mitsubishi, a large department store located in Tokyo.

The Brazilian company benefits from the time difference, as it operates during hours when it would be more expensive for the Japanese company to maintain a night shift team.

"Today, the company's international operations already account for 5% of its R$500 million revenue. We expect that percentage to rise to 20% by 2012, helping us reach R$1 billion in revenue," says Ribeiro.

The president of HSBC's Global Technology Center in Brazil, Jacques Depocas, complains about the lack of promotion of Brazilian products abroad and the outdated exchange rate. The prices charged by HSBC's three global technology centers are the same for Brazil, India, and China. The difference is that, when the Brazilian office opened nine months ago, the dollar was worth R$ 2,70. Compared to the current exchange rate (below R$ 2), the margin loss is R$ 0,60 per hour. Humberto Ribeiro, director of Politec: competitive disadvantage.