Combating informality would increase GDP by 1,5%


Author: Ronaldo D´Ercole

Source: O Globo Online, Economy, 08/06/2004

SAO PAULO. Far from being an attempt to circumvent Brazil's social problems, the high level of informality in our economy directly affects the productivity of companies and prevents the country from growing at the same pace as other emerging economies. This is the main conclusion of a study by McKinsey consultancy commissioned by the Brazilian Institute of Business Ethics (Etco).

The study cites data from the World Bank (Bird), according to which informality already accounts for 40% of Brazil's gross income, and estimates that 55% of the country's employed population work informally.

In order to illustrate the effects of informality on the performance of the Brazilian economy, McKinsey runs a simulation: a successful program to combat practices such as evasion, smuggling and piracy, which could reduce the level of informality by 20% in the economy, it would result in an extra productivity gain of 1,5% per year for the country.

McKinsey: informality hits the whole economy

"As the key to economic growth is productivity, it can be estimated that the additional gain in terms of GDP (Gross Domestic Product) expansion would also be close to that rate," said McKinsey consultant Joe Capp.

The study, which was presented yesterday during the seminar “Parallel Brazil versus Economic Growth”, promoted by Etco, also finds that informality already affects, to a greater or lesser extent, all sectors of the economy in Brazil.

Among the champions of informality are trade, civil construction and sectors of industry that use labor-intensive, such as the textile - clothing and clothing. In agriculture, the level of informality of the employed workforce reaches 90%.

"A harmful environment of generalized civil disobedience has been created and society is poorly organized to react to high taxes, excessive bureaucracy, and the slowness of justice, and it reacts ignoring the law," said Etco President Emerson Kapaz. ? So we have to work to raise awareness among the government and society as well about the seriousness of the problem.

For economist, Brazil remembers “a great Paraguay”

Eduardo Giannetti da Fonseca, an economist at the University of São Paulo (USP) who was one of the seminar's debaters, went so far as to claim that Brazil, in a way, already resembles “a great Paraguay”.

"Things are heading in a bad direction, and the environment in the country does not favor increased productivity," said the economist.

The chairman of the Board of Directors of Grupo Pão de Açúcar, Abílio Diniz, used a data presented by McKinsey, according to which tax evasion in food retail increases the profitability of the informal trader by 300%. In terms of comparison, in Mexico, a country that has a much lower tax burden than Brazil, this gain would not exceed 75%.

"There is no logistics, information technology, efficiency and productivity to compensate for the gains from informality," said Abílio Diniz.

Professor highlights cultural aspect of the problem

The economist and professor at Princeton University (USA) José Alexandre Scheinkman highlighted the “cultural aspect” of informality in the country, but he warned that the problem is serious and, therefore, structural reforms, especially taxation, must consider this aspect of national economy.

"The issue is very important and, if Brazil is not attacked, it will not progress," said Scheinkman.