Informality or growth

By ETCO

Source: The State of S. Paulo - 08/06/04


Calculations about the size of the informal economy in Brazil are impressive.


Come on. The World Bank, for example, estimates that it accounts for about 40% of gross national income and 50% of non-rural Brazilian labor. A March 2004 survey by FGV, involving 50 thousand small businesses that occupy up to five people, reveals that only 15% pay taxes, 12,3% have a National Register of Legal Entities and 21,1% are legally constituted, and can therefore considered formally registered.


The most shocking data, however, is that of the agricultural sector, where the level of informality reaches 90%.


Considering that informality is one of the main obstacles to economic growth, the ETCO Institute ordered a survey from McKinsey, a consultancy on the subject. They believe that, to reduce it, the best way is to understand it. The results will be presented at a seminar today at Rosa Rosarum.

The data on informality in Brazil compiled and analyzed by McKinsey speaks for itself. In 11 sectors, related to agriculture, retail and construction, in addition to industrial sectors and labor-intensive services, corresponding to 63% of total employment, more than half of the employed workforce is in an informal situation. In the audiovisual / software sector, informality has been growing rapidly. In 97, only 5% of the CD market was pirated in Brazil, in 2002 pirated CDs already accounted for 53% of the market. In the fuel sector, informality has been growing rapidly, particularly in non-flagged stations, which increased their share from 6% (99) to 27% (2002). In total, tax evasion in the sector may exceed R $ 3,3 billion, an amount higher than the total oil royalties in 2002.


The clothing sector has one of the highest levels of informality, with over 60% of occupations. According to Abravest's estimate, piracy appropriates about R $ 3 billion per year, or about 8% of the sector's revenue. In the case of cigarettes, of the total of 151 billion units sold per year, more than a third (51 billion) occurs illegally, with more than 35 billion due to smuggling. Tax evasion reaches R $ 1,4 billion, compared to an annual tax collection of approximately R $ 4,3 billion.


Causes of informality in Brazil, according to McKinsey. Regulatory rigidity and complexity, tax charges, performance of institutions and sanctions. In contrast, the international experience, although limited, suggests that successful programs for formalizing the economy require four fundamental questions: government priority, sectoral focus (the issue is too complex to allow for standardized solutions), structural reforms (updating the database on taxpayers and integration of information systems, creation of a simplified taxation system for SMEs, creation of a specific body and courts to combat tax evasion and the intensification of penalties and prosecutions against offenders) and accountability and coordination.


For ETCO, removing barriers to the formal economy is possible. The McKinsey study estimates that the growth potential in GDP per capita would be 7% per year.

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