With 1/3 of the country's income, the informal sector resists the resumption


Source: Folha de S. Paulo, 09/01/2005

Rogério Cassimiro / Folha Image
Street vendors sell goods on the Porto Geral slope, in downtown São Paulo; street shopping is one of the main focuses of informality

By Claudia Rolli and Fátima Fernandes

The resumption of the Brazilian economy did not alter the structured informality in the country, which today reaches 35% to 40% of national income, as estimated by the World Bank and the federal government.
Employment, tax collection and social security contributions rose in 2004 - a sign that informality has lost strength in the labor market.

But smuggling, piracy and tax evasion, which also make up the informal economy, are growing steadily, according to businessmen and experts. They consider this to be a worldwide trend even to face strong competition with China.

“When the economy grows, the formal job market improves, as we saw last year, with the increase in formal contracting. But informality is a worldwide trend that is part of the logic of production. Furthermore, competition with China is not easy, ”says Gilberto Dupas, general coordinator of USP's International Situation Group.

World Bank survey of 133 countries shows Brazil in 9th place in the informality ranking - the undeclared economy in the country represents 39,8% of gross national income. It is above the average of the countries -32,5%.

The phenomenon manifests itself in different ways in different sectors, according to a study by McKinsey & Company: irregular hiring of workers, purchase and sale of unreported products, counterfeiting of goods, copyright infringement, product adulteration and tax evasion.

The Brazilian textile industry is one of the hardest hit by informality. The sector has revenues of approximately US $ 13 billion per year. Another US $ 5,2 billion is handled annually in the black economy, according to Abravest, an association that brings together clothing companies.
The clothing factories came to make US $ 20 billion in the 80s. “Informality took over the sector,” says Roberto Chadad, president of the association.

Entrepreneurs from Brás, east of São Paulo, where there are around 6.000 clothing companies, admitted to Folha that they do not pay taxes in full or contract with registration. If they obey the law, they close the doors, they say.

In the toy industry, the loss from smuggling and piracy reaches R $ 100 million per year, which is equivalent to 10% of the sector's revenue. In the case of musical instruments, the percentage is 18% of annual revenue.

About 58% of eyeglass sales are in the hands of smugglers. This is equivalent to a loss of R $ 350 million per year - half of the sector's turnover.

Of every ten portable electronics, such as clock radios and recorders, four are sold without a note, says an industry manufacturer. In the CD market, pirated copies account for 50% of sales - in 1997 it did not exceed 5%, according to manufacturers.

In the pharmaceutical sector, the informality index reaches about 30% of sales - in 1997 it was no more than 10%. In the case of fuels, 10%, according to the study by Mckinsey.

The BSA (Business Software Alliance) and Abes (Brazilian Association of Software Companies) report that the software piracy rate in the country is 61%. This leads to a loss of R $ 519 million per year - the average piracy rate in the world is 36% and generates losses to the sector of US $ 29 billion per year.

The “gray market” for computers has taken a leap in the past five years in the country. In 1999, pirated PCs accounted for about 59% of sales in the country. In 2003, 70%. Estimates for the end of 2004 were close to 74%, according to Abinee (Brazilian Association of the Electrical and Electronic Industry).

Of the 150 billion cigarettes sold annually in the country, 35 billion enter the country illegally, coming from Paraguay, Uruguay and China. This smuggling results in tax evasion of R $ 1,4 billion. In the beer and soft drink sector, evasion, which occurs in the entire production chain, is almost the same size: R $ 1,3 billion, according to Mckinsey.

In the calculations of the World Customs Organization, piracy represents 9% of world trade and generates R $ 1,25 trillion per year. In Brazil, R $ 56 billion per year. The collection loses about R $ 84 billion annually and 2 million jobs are cut, according to the Piracy CPI.

For entrepreneurs and specialists, informality reflects the high tax burden - up to 40% for some products -, high bureaucracy, the complexity of laws, the slowness of justice and inefficient inspection.

“We have reached a point where informality is part of the Brazilian culture. Crime pays off, since the profit is big, ”says Emerson Kapaz, executive president of Instituto Etco, a non-governmental organization for the defense of business ethics.

The consumer ends up supporting the informal market because he is always concerned with the pocket. “This is already my third Louis Vuitton bag. I don't mind buying the “falsifiquê” [counterfeit product] ”, says Jô Belluco, 37, event manager.
For entrepreneurs and economists, even if the economy grows 10% a year, the impact on the informal market is unlikely.